When The Tide Goes Out ...
Warren Buffett has this great quote: “It's only when the tide goes out that you learn who's been swimming naked.”
When times are good, people and companies float along effortlessly and everyone seems to do well. Hence the saying, "A rising tide lifts all boats."
When times are tough, we start to see winners and losers. People who overspent on cars and houses suddenly lose income and they might be unprepared with no savings, vulnerable, naked. The same goes for companies. Companies that relied on unsustainable business practices suddenly lose revenue and can't service their debt, can't buy back their stock, can't maintain (artificial) growth.
This is a crisis right now and the tide is out.
One can argue about lucky or unlucky. There is a ton of luck involved in any endeavor, and a crisis upends assumptions that might have appeared solid. Opening a restaurant with some debt is a normal thing to do during normal times. Opening a restaurant with some debt in January 2020 is unlucky. These are not normal times.
The Fed is effectively trying to take luck and preparedness out of the equation by flooding the market with liquidity and raising the tide through financial engineering. All the water metaphors are at work. No one really knows what happens next ... we're in uncharted waters ... or we're out of the water completely ....
When I look at my portfolio I want to be positioned in stocks that will perform at low tide, either now in the short term or potentially in the long term. It's not easy because not every investment will work right away, and with limited funds I can't wait for a stock to go all the way down and all the way up. I need it to work reasonably soon, or I need to hedge it somehow. One needs to anticipate the portfolio of the future when picking stocks today.
Take oil stocks for example. Oil is at crisis levels. Therefore, the only stock I really trust is Exxon Mobile. It has the balance sheet to survive. I may need to wait for XOM to pay off so this is an investment rather than a trade. It's in an account that I won't likely touch for 20 years.
While I'm waiting on XOM, I'm trading another position as a hedge. My trading example is Frontline Ltd. (FRO). Frontline transports oil with its fleet of tankers. There is such a glut right now that oil companies are paying for tankers to simply store the oil, and they are paying historically high rates. Thus, FRO benefits from the oil crisis (up 12% today). These tanker stocks are very volatile.
So, I'm trying to make the pieces of my portfolio work together, so that when oil is down, I'm up, and when oil is up, I'm up. So far, this particular example is working.
It's a microcosm of what I'm trying to do with the broader portfolio. Gold stocks are working when the indices are down, and sometimes when the indices are up. There are still some groups that aren't working well when indices are up or down. These should be sold in my opinion. I've sold off some REITs and banks that are just acting sluggish every day. There are better sectors.
Overall the stock indices seem to want to go up. Just remember that risk rises along with prices. I think we're in the eye of the hurricane. More water metaphors.
Our biggest challenge is that we rent a small apartment and never imagined that we might not be allowed to go out to parks and restaurants. Other than a political coup or nuclear war, is there any other situation that would require sheltering in place? So, apartment living right now is bad luck. The tide is out and our living situation is flawed. With 2 young kids, very flawed.
There's no easy answer to this in the short term. Right now we're renting houses in the country but it's not sustainable forever. The question that keeps coming back to me is: what would I want my living situation to look like in the future, knowing that I can't predict the course of the pandemic?
There are some short term solutions but just like the portfolio, we can't put all of our funds into a short term solution to the detriment of the future. We need our decisions to work now and later.
I'm not sure how we will do this but mostly we will need to continue cultivating mindful stoic mental resilience and sanity. I'm not sure if a crisis builds character or just reveals character. Either way, a prolonged crisis demands character. My family has had plenty of difficult moments but we are together, we're healthy, and we're doing our best.
What I'm Watching: The Chicago Bulls documentary, The Last Dance.
What I'm Reading: Almost done with Gray Mountain by Grisham.
What I'm Doing: I chopped some wood for the fireplace in our rental, and there's something incredibly satisfying about chopping wood and burning it. Why does it seem we're all regressing to earlier times? Chopping wood, baking bread, knitting, etc. In a previous post I wondered if A.V. (After Virus) living would be a renaissance -- celebrating the past because modern systems are seemingly failing us.
When times are good, people and companies float along effortlessly and everyone seems to do well. Hence the saying, "A rising tide lifts all boats."
When times are tough, we start to see winners and losers. People who overspent on cars and houses suddenly lose income and they might be unprepared with no savings, vulnerable, naked. The same goes for companies. Companies that relied on unsustainable business practices suddenly lose revenue and can't service their debt, can't buy back their stock, can't maintain (artificial) growth.
This is a crisis right now and the tide is out.
One can argue about lucky or unlucky. There is a ton of luck involved in any endeavor, and a crisis upends assumptions that might have appeared solid. Opening a restaurant with some debt is a normal thing to do during normal times. Opening a restaurant with some debt in January 2020 is unlucky. These are not normal times.
The Fed is effectively trying to take luck and preparedness out of the equation by flooding the market with liquidity and raising the tide through financial engineering. All the water metaphors are at work. No one really knows what happens next ... we're in uncharted waters ... or we're out of the water completely ....
Low Tide Investing
When I look at my portfolio I want to be positioned in stocks that will perform at low tide, either now in the short term or potentially in the long term. It's not easy because not every investment will work right away, and with limited funds I can't wait for a stock to go all the way down and all the way up. I need it to work reasonably soon, or I need to hedge it somehow. One needs to anticipate the portfolio of the future when picking stocks today.
Take oil stocks for example. Oil is at crisis levels. Therefore, the only stock I really trust is Exxon Mobile. It has the balance sheet to survive. I may need to wait for XOM to pay off so this is an investment rather than a trade. It's in an account that I won't likely touch for 20 years.
While I'm waiting on XOM, I'm trading another position as a hedge. My trading example is Frontline Ltd. (FRO). Frontline transports oil with its fleet of tankers. There is such a glut right now that oil companies are paying for tankers to simply store the oil, and they are paying historically high rates. Thus, FRO benefits from the oil crisis (up 12% today). These tanker stocks are very volatile.
So, I'm trying to make the pieces of my portfolio work together, so that when oil is down, I'm up, and when oil is up, I'm up. So far, this particular example is working.
It's a microcosm of what I'm trying to do with the broader portfolio. Gold stocks are working when the indices are down, and sometimes when the indices are up. There are still some groups that aren't working well when indices are up or down. These should be sold in my opinion. I've sold off some REITs and banks that are just acting sluggish every day. There are better sectors.
Overall the stock indices seem to want to go up. Just remember that risk rises along with prices. I think we're in the eye of the hurricane. More water metaphors.
Low Tide Living
Financially we are doing ok because we have stable incomes and very little debt. The crisis is not a financial disaster. It's challenging in other ways.Our biggest challenge is that we rent a small apartment and never imagined that we might not be allowed to go out to parks and restaurants. Other than a political coup or nuclear war, is there any other situation that would require sheltering in place? So, apartment living right now is bad luck. The tide is out and our living situation is flawed. With 2 young kids, very flawed.
There's no easy answer to this in the short term. Right now we're renting houses in the country but it's not sustainable forever. The question that keeps coming back to me is: what would I want my living situation to look like in the future, knowing that I can't predict the course of the pandemic?
There are some short term solutions but just like the portfolio, we can't put all of our funds into a short term solution to the detriment of the future. We need our decisions to work now and later.
I'm not sure how we will do this but mostly we will need to continue cultivating mindful stoic mental resilience and sanity. I'm not sure if a crisis builds character or just reveals character. Either way, a prolonged crisis demands character. My family has had plenty of difficult moments but we are together, we're healthy, and we're doing our best.
What I'm Watching: The Chicago Bulls documentary, The Last Dance.
What I'm Reading: Almost done with Gray Mountain by Grisham.
What I'm Doing: I chopped some wood for the fireplace in our rental, and there's something incredibly satisfying about chopping wood and burning it. Why does it seem we're all regressing to earlier times? Chopping wood, baking bread, knitting, etc. In a previous post I wondered if A.V. (After Virus) living would be a renaissance -- celebrating the past because modern systems are seemingly failing us.
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