Ok…. What do you do in a bear market?

It has been a bit since my last post and boy a lot has happened. To sum up, going into 2020 most indicators pointed to a modest (maybe even mildly recessionary) slow down if there was going to be one, but a pandemic decided to pretty much make the economy hit a brick wall. The chart of the S&P explains the situation quite well actually:

Given the speed at which the market has fallen, it is apparent that the majority of people (or robots) allocating capital were caught off guard at the breadth and depth that COVID-19 would impact the economy. To put the the velocity of this into perspective I stumbled upon this chart:

Found via Twitter – I think this may be WSJ

The speed is actually a big deal because of two reasons

  1. It means that the market as a form of discounting future returns never saw this coming, so everyone is quickly trying to recalibrate valuations
  2. On the investor side (specifically retail investor side), it means you haven’t been given too much opportunity to exit the market or try to mitigate the losses if you wanted to

So, not that it would be particularly helpful to anyone, but I thought I would write about what I’m doing in this bear market and perhaps give myself a grade so that when I look back I can get a sense of how I felt in real time. Sometimes when you look back at market cycles you recall the events differently, so kind of trying to make an honest check for myself.

Health & Safety – Grade A

Unlike other bear markets in which I have invested through, this is actually a health crisis, so health and safety has been a primary focus. I hope that this is the only bear market I invest through that is caused by a health crisis, period. I think I have been lucky enough to be able to work from home, my fiancé is now able to work from home, and we were able to get plenty food and… TP to last a few weeks so with that focus I think we are adequately helping in flattening the curve.

Personal Finances – Grade C+

The goal of personal finances as it relates to a bear market is being able to survive but also add to your investments. Cash is king! My actions to date have been to lower my leverage within my portfolio, done through a combination of new deposits and selling some positions. Lowering my leverage hasn’t made me rethink my strategy as much as it has made me think that I need an efficient strategy to unwind said leverage. Coming up with a strategy around portfolio construction is something to think about going forward. In addition to lowering leverage I have placed more focus on 401k purchases. I think if anything, the lean to additional 401k deposits is probably the decision I will look back on very favorably. Individual companies are my primary focus, but this seems like a great time to take advantage of higher future expected returns for the total market, from Vanguard:

https://advisors.vanguard.com/insights/article/asharpcontractionthenanupswing

At this time I don’t feel that I have done as well with my personal finances as I should have been doing. When I look back on this, it’s a reminder to make this a constant focus. In particular, really devise a plan to lower leverage efficiently.

Building a Model – Grade TBD

It is always important to try and model out what you think the market will do, even if it is at high level. I don’t pay too much attention to macroeconomics because I focus more on individual companies and try to maximize my investment in those companies, but it is important to try and have at least a sliver of an understanding of what is going on.

I have a model, and at least as of right now it seems to kind of be playing out. Some of the things we do (kind of) know:

  • Historically, during health crisis, the market that is impacted bottoms at the peak number of cases- primary reference is SARS & Hong Kong. but the push is that this is global
  • A portion of the economy is dramatically impacted (SMBs, retail, hotels, travel), and another portion of the economy is maybe almost benefiting from it (technology, consulting, grocery and CPG)
  • The Fed is pumping the gas with monetary, and we just completed the fiscal package (whether good or bad it was 10% of GDP)
  • Given the speed, as mentioned before, based on all metrics we are largely oversold (that isn’t to say we should go up, or that this is the bottom but that all the market action has been selling without much buying)
  • Lastly, sentiment went from euphoric to panic very quickly. I really like this chart from Citigroup:
From Citigroup Research – found while using Twitter

So, without going into it too much, this is kind of what I’m thinking as of now. The market may be near a bottom given sentiment, market behavior, and the government action but looking at past viral outbreaks we still need to see a top in infections. A good chunk of businesses have been wrecked because of this, so I’m kind of trying to think through how this all plays out, perhaps we have this odd scenario where the market decouples from business fundamentals. Something to think about.

Building a Watchlist/ Buy List – Grade A

I have done a good job adding to my watchlist businesses I think I should try to own. Additionally, I have been constantly reviewing the companies I currently own shares in and I feel even more compelled to buy more shares. As mentioned above, it is apparent which companies are getting hit due to immediate business impact versus companies that are simply falling due to mass selling. I am a generalist (meaning that I don’t specialize to a sector/factor), but this is a really interesting opportunity to investigate the sectors that are hit hard if you have never looked at them before. I haven’t purchased anything on my watchlist/ buy list but I’m starting to get interest in some of these names. I previously posted my watchlist here. Here are a few names I’m adding to the list, still haven’t too actively purchased, but may do so at anytime:

  • Hilton Worldwide Holdings (HLT)
  • The Madison Square Garden Company (MSG)
  • Vail Resorts, Inc. (MTN)
  • Rollins, Inc. (ROL)
  • Diageo plc (DEO)

Distractions – Grade A

With constantly being pounded by news, and a lot of it is negative these days, it is important to try and distract yourself or divert your focus to more happy and/or productive activities. For me, playing with my son has been non-stop, downloaded tons of podcast, finally getting to some of these books that I have purchased, and started some new shows (but the best one coming back is Westworld hands down). Goal is to not to be too depressed, at least as of right now I’m doing reasonably well.

Summary

Market has been absolutely crazy, but its pretty logical to rapidly reassess the valuation of companies earnings due to COVID-19’s impact. The speed has been crazy but I feel like I have been doing an ok job in navigating it. Initially raising some cash and lowering leverage. Then developing a reasonable understanding of the situation, albeit its tbd whether or not this is helpful or successful. I have been doing a good job building a list of potential investments, but haven’t pulled the trigger yet. Lastly, it has been difficult, but I have been doing ok distracting myself so that I don’t get depressed.

One last note: If you (or me) is in this or in a future bear market and is scared, this is a reminder that you can’t really avoid the being scared part too much but you can try your best to control your actions. Whether this be to protect your family, boost finances, or buy (or sell) stocks, being scared is kind of part of the game but you just have to do your best as see it through.

Please review the disclaimer, and please do your own due diligence. I’m not that great of an investor.