Saturday, March 14, 2020

Turning Panic Mode Into Opportunity

The past week has been brutal to most investors because of the speed and magnitude of the drop that left investors wondering if this is finally the big upcoming recession they have been waiting since the Great Financial Crisis back in 2008.

What was supposed to be a small containment case of the Covid-19 in China alone has spread to all over the world. This has now no longer been compared to just SARS but possibly something bigger than that.

Regardless of what your portfolio allocation is, chances are it brings some magnitude of damages to your portfolio even if you are holding gold as a safe haven hedge. Cryptocurrency is not spared either, dropping a massive 40% from the recent peak where bitcoin hits $10k.



The past week we've seen Black Monday, Black Thursday and then Black Friday (before bouncing off the lower low) within a space of a week. This is some volatility we've not experienced for a while and the bloodbath struck so fast that many investors chose to exit their positions waiting for a lower entry to enter.

Now, I can understand the rationale of investors who tried to cash out their positions because they are retirees who live on these incomes for the rest of their lives. But if you are in the stage of accumulating wealth I don't see why would you try to do that.

If not adding any further position into your portfolio during periods is bad enough, cashing out your investment and reverting back to cash position is just simply unimaginable.

The only reason I can think of is these people think they can for some reason get back into the market at the bottom and then ride the market back up. If that rationale is true and they believe that their timing is so perfect, then it doesn't make a difference that they should try to short the market on the way down.

I've bought a couple of companies in the past week carnage that I think has provided some decent valuation in the long run.

The first one is Delta Airlines (NYSE: DAL) which has suffered more than 35% year to date loss at the moment. Under normal BAU, this stock is trading at an attractive valuation of just 7x PER with the potential to grow their capacity over the next few years.

This is not going to happen now with all these Covid-19 situations but if this is just a passing phase, then we knew it will revert back to the mean eventually. My purchase price is closer to 5x PER with an added incentive that oil price is now lower than previously, which should help the company mitigate their costs base.

Will Delta's airline decline further next week? Maybe yes. But will Delta's airline gone out of business because of this? I doubt so. The company has a strong balance sheet to ride this storm out and they will use this opportunity to increase their standard upgrading schedules and capacity reduction meanwhile.

Will Delta's airline start to carry passengers again and resume their route to Europe (now suspended) once these things are blown over? Chances are a high yes. If that is so, then there is a good potential opportunity for the stock to rebound back to the previous valuation. If we think the Covid-19 is going to play out in a year's time, then 35% revert back to mean sounds like a decent risk/reward to take.

When there is news last week that the Saudi was engaging a price war on the oil front, I loaded more of Royal Dutch Shell (LSE: RDSB) after the share price tanks by a further 25% last week.

While I am currently sitting on a loss in this position (-8% from my average purchase price), I am gingerly confident that my loss will just be temporary.

First, we knew that the demand for oil has been low for some time since the Covid-19 takes place. There are travel restrictions in place and people are generally just scared to cruise and travel during these periods. But if Covid-19 is going to play out for just over a year, then soon enough we will see more traveling taking place and people going back to their usual routine where they can enjoy their cruises over the Antarctic Ocean. When that happens, we are likely to see demand for oil rising back up as airlines and cruises start ramping up capacity to meet the rising demand.

The supply of oil is one that is still a rather black box at this moment. Both the Russian and the Saudis are engaging in a price-war that neither is winning. In the long run, both will end up suffering and price war never benefit the equilibrium. My take to this is we are likely more than not to see Opec coming back to the negotiating table and reaching an agreement, though this may take likely a year or two or five, god knows when.

For Shell, if you look at my previous article, their upstream channel has been supported by some of the downstream segment which helps to mitigate the direct impact on oil prices. Shell is also another company that has been a believer of clean renewable energy so its bottom line is not as impacted as the other upstream players like Exxon or BP.

At the current valuation, Shell gives 13% yield (they've maintained this for the longest time ever) and are continued to be rated A-1+ and Aa2 y S&P and Moody respectively. This is a strong testament to their balance sheet and cashflow position.

Like I previously mentioned, they have also embarked on an aggressive share repurchase program so in the event cashflow becomes an issue, they can always pull this card out for the time being.


Apart from these companies, I have also bought a couple of other positions such as Apple (Nasdaq: AAPL), Sinopec (HKG: 0386), Mapletree Com (SGX: N2IU), CDLHT (SGX: J85), Dairy Farm (SGX: D01) and HKLand (SGX: H78).

I believe these companies are not only strong enough to ride this storm out but will also prosper in a year's time when the world goes back to normal BAU operations. What is comforting is knowing I bought into these companies at a good valuation so I am not worried that they will go bust.

My only divestment during this period is MTQ but this was more of recycling into a similar theme like RDS from a better risk-reward perspective than cashing out on it altogether. If MTQ risk-reward looks better, I might just get back in.

Observations

Whilst I understand that different investors have different strategies they are seeking to ride out this storm, what irks me the most is when someone tries to claim they know when the bottoming will take place and they will only start to enter when things "start" to stabilize.

I personally think that this is a basic investing principle 101.

Investors never get the best value out of the market only when things start to stabilize. If you think by watching the news and market for 24/7 and you can time to enter at the bottom, then chances are you are likely to miss out on the best part of the rebound.

Huge opportunities and the best decisions are often made when outlooks are uncertain and not when the sky is clear.

What about taking a hedge position to your portfolio then?

Personally, at this stage, I don't see the point of buying hedges.

It would have made sense to hedge a couple of months ago when the market was still high and volatility is low. But if you are just like me, who have been caught up in this bear market, then it doesn't make sense to hedge because it is an equivalent of selling your stake and waiting for an opportunity to ride the up back in once volatility settles down.

It would make more sense to keep buying with every big downward move (say 7% or 10%) and continue to average down from there. That's a strategy that's almost guaranteed to work if you are patient enough to have your holding power.

For Those Waiting The Right Signal To Buy

If you think those in the position are stressed right now because they just see their profits evaporated this year, those in cash who have sold their positions and waiting back right in will be even more stressed because they have to constantly watch the market goes back up and down, not knowing when to enter, not knowing when things start to stabilize and not knowing when the market will ride the trend back up in.

The market will always react faster than you so it is unlikely that you will be catching the waves faster than the professional institutional out there.

There will constantly be "noises" around the people that will ask you to sell and wait because they think the worst is not over but like Howard Marks said in his recent article, it is anyone's guess at best. If someone tells you that the worst is probably not over and the market will continue to go down from here, it is luck at best and not a conviction. If it is a conviction, then it would make sense to take an opposite short position to take advantage of there. There are a few successful people doing that, but for most of the people on the street, they are not.

Final Thoughts

Every panic mode like this is an opportunity where wealth changes hands.

12 years ago during the financial crisis, I heard similar "noises" from many parties who decide to cash out and wait for an opportunity right in. I decide to do otherwise and came out of the GFC much stronger than I expected to be. The same goes for every crisis opportunity since in 2011 and 2016, and hopefully the same as well in 2020.

If my case wasn't a decider enough, take a look at people like local bloggers Sim Tian Eng, ASSI and Createwealth888. Most of their success today came from taking risks and opportunities in a market where no one wants to step in and today they are the bloggers that we all respect and wanted to be in 10 or 20 years' time.

The hardest part about investing is in the emotional aspect, only in winter we will see the strength of those and know who has been swimming naked.

Thanks for reading.


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31 comments:

  1. Hi B

    It is great to see posts from veteran investors / bloggers like you. Not many bloggers has the battle scars from the 2008 GFC.

    What kind of rules do you set to manage your war chest drawdowns? Since no one can preciesly determine how much more the market will decline or stay at a low?

    ReplyDelete
    Replies
    1. I do not think B has gone thru 2008 GFC as he just started at the age of 24. Now he is only about 34 years.
      Even if he had just started during that time, his portfolio will be very low in value.

      Regards

      Sam

      Delete
    2. Hi INTJ

      You flattered me. I don't have as much experience as others yet when it comes to battling the bear market.

      My general rules is once a bear market arrives (typically within 20% to 25%) I start putting relatively aggressive amount of warchest, maybe in the range of 70%, leaving the rest potentially for further downside in the market. The bear market usually lasts for quite a while as well so (with various ups and downs) I will have some form of income coming in to add on each month from there in the form of new injections. I won't likely catch the bottom for sure but a blended mix balance of this strategy usually works well for me in the past when the market returns to its normal self.

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  2. Hi B,

    Why did you prefer CDL Hospitality Trust over Ascott Hospitality, also I thought Mapletree Commercial Trust is still expensive (P/B 1.29), what is your reason for entering as this juncture? Are you also eyeing Comfort Delgro and SQ?

    ReplyDelete
    Replies
    1. Hi JoJo

      I'm a big fan of cdlht when it comes to hospitality reits in Singapore so it ranks higher than feht and ascott. I think its more to do with the sponsor and past historical the management shows they can extract better value out of its properties.

      Mct is not yet a bargain like in the past, probably similar to fct and cmt range but it's quite unlikely we will see them reverting to the past. If so, that would mean a lot more bargains for the other reits.

      CDG is also another potential in my watchlist but for SQ I'd rather get US Airlines for exposures into the industry.

      Delete
  3. B, which RDS did you buy? A or B on the LSE

    ReplyDelete
  4. This comment has been removed by a blog administrator.

    ReplyDelete
  5. The market will always react faster than you so it is unlikely that you will be catching the waves faster than the professional institutional out there.
    I like the above you wrote and fully agree.
    But there are many retail including one friend who think they are smarter than the market. Everyday see but don't buy and very confident that end of the year is the time to buy. Because someone said this virus will last for a year. If so confident about the timeline, why still keep seeing everyday. LOL.
    Started investing in 1990, so many crash I also can't remember clearly. Happily retired at 48. I have no idea when market will bottom although I have experience catching it in 2008/2009. But I won't bank being able to repeat it and had started buying slowly last month.

    ReplyDelete
  6. Great article. I'm looking into buying in the week too. Amazon and Netflix look compelling now. Welcome to see my posts and picks at www.thefi35.com

    ReplyDelete
  7. This comment has been removed by a blog administrator.

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  8. This comment has been removed by a blog administrator.

    ReplyDelete
    Replies
    1. This comment has been removed by a blog administrator.

      Delete
  9. Hi, B
    Have enjoyed reading your posts all along. M currently looking at US stocks and curious which platform do you use to trade? Any recommendation?

    Thanks!

    ReplyDelete
  10. Hi B,

    It’s been awhile! I was shocked when I am back in the blogosphere to see ur smaller port now. Heard you already turn portfolio into property!

    Anyway, I been patience for the past few years waiting for this market crash moment.

    But it’s better to have a proper plan prior this market crash. Otherwise like most of the bloggers who are caught by surprise by this crash, hard to devote a plan when u still have stocks that already so sunkened!

    That’s why liquidate my stocks back then!

    ReplyDelete
  11. RDSB is valued at 1000+, the minimum 100 shares on dbs vicker will cost a bomb even though the yield is good. I guess there are no etf option for this right?

    ReplyDelete
    Replies
    1. That's in pence. Not pounds
      So wont cost a bomb

      Delete
  12. Hi Brian, followed u in fb hence get to know your blog. Do u mind sharing your updated portfolio during this period. thank you!

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