While the market remains at all-time highs, I remain skeptical and a lot of that is because I allowed myself to become complacent in 2007, after having missed the rally of 1999 because that, too, was ridiculous. In retrospect I was right – but not until March of 2000 and I could have had some fun betting on anything with a pulse in 1999 so, when 2007 came along – I finally went with the flow and, while we had pretty good timing in 2008 getting out on top – a lot of people didn't. So I guess, this time around, I just want to make sure nobody gets burned when this thing collapses.
We are all shaped by our past and we all run our own gauntlets to become the people we are today. I know I trade like an old man because I learned from my Grandfather, Max Davis, who was born in 1903 and, in 1973, 10 year-old me laid on the floor on Sundays with the stock section of the paper laid out on the floor (you only got stock reports on Sundays back then), circling companies that made new highs or new lows so we could later investigate why it was happening and then Grandpa would do his Fundamental Analysis of the companies (often including actually visiting the company) to decide if there were any hidden values there.
Having lived (in England) through World War 1, the Pandemic that followed, the Great Depression and World War II, Grandpa Max had seen a lot of shit – and he was very good at conveying his experiences to me from both a Social and Economic perspective. Though he never went to college, Grandpa Max was a voracious reader and a very sharp businessman. Learning from him always gave me a long-term and patient perspective on stocks and, since we only got stock news on Sundays anyway – you learn to be patient by default.
So of course, growing up, I gravitated to books by Jeremy Grantham (also British) and Warren Buffett and that's my "style" – value investing but my twist on it (as I'm 30 years younger) is to use options for hedging and leverage – rather than just trying to be a market-timer with on and off bets. Of course, the "Be the House – NOT the Gambler" strategy we've developed at PSW is even more boring than traditional value investing because, rather than getting in and out of stocks – we tend to stick with them and turn them into income-producers – just like a casino does with its games…
There's nothing exciting about running a casino – it's all statistics. I used to consult for casinos in Atlantic City and they have spreadsheets for every single table and machine in the place and they can predict how much they will collect and how much they will pay out almost to the penny – over the long haul. In the short run – it could go either way. Since the stock market is not totally random, we are able to add an extra layer of advantage to our system by paying attention to the news – to fine-tune our timing.
The rigging, the manipulation, the "Fake News" – it's all part of the game and we don't care IF the game is rigged, as long as we can understand HOW the game is rigged and participate in the game and stock options allow us to get on the other side of the table and Be the House.
But the house is not a thrill ride – it's a grind. This is not a system for adrenaline junkies – this is a system for long-term investors who find their thrills from increasing their balance sheet over the long run. We know how much money we expect to make when we open our positions and then, over the course of usually 2 years, we determine whether the positions are on-track or off track and make usually minor adjustments along the way.
We don't even like to play stocks that go up or down more than 20% – it doesn't make us more money. We like stocks (and markets) that stay in a range – that's why bubble markets can be annoying to us. Jeremy Grantham is also annoyed and is warning people about the current situation:
“We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust,” he said. “When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years.”
How bad will the next bust be? Very bad, Grantham indicated. On the order of the 1929 crash at worst or the dot-com bust at best. Grantham doesn’t subscribe to the bullish take that technology is transforming the financial world so much that old equity valuation models can be disregarded. And he pooh-poohs the Federal Reserve’s current reputation as the all-powerful healer for any mishap—because the Fed can’t lower interest rates further if another calamity strikes.
“At the lowest rates in history,” he said of the Fed, “you don’t have a lot in the bank to throw on the table, do you?” His hardline bearish take has taken a toll on GMO in recent times. Its main fund, GMO Benchmark-Free Allocation, lost 2.5% in 2020, a year that the S&P 500 romped with an 18.4% return. The fund has stayed clear of growth stocks, the place to be of late. His investors pulled some $2 billion out last year.
And that's the economics of running a hedge fund or a market newsletter – do you try to make your members happy or safe? What is our real responsibility here? As I said, we are shaped by our experiences and I saw too many people stay too long in the 2008 market and take very difficult losses and I asked myself, at the time, if I could have done a better job of warning people.
Don't get me wrong, I did warn people but I sounded like Chicken Little and I got a lot of negative feedback and people still wanted stock picks so I went with the flow – despite my misgivings. Although we went short on the market ahead of the crash at PSW – there were plenty of people who didn't follow us out or didn't hedge so THIS TIME, 13 years later, I'm a little more cautious – that's all.
Not that we aren't able to make money, of course. The S&P 500 was at 3,100 in October of 2019, when we began most of our new(ish) Member Portfolios and now it's at 3,931, which is up a very impressive 26.8% and ALL of our portfolios are outperforming that by a country mile. Where we suffer is not having the 1,000% GameStop (GME) returns – we simply don't bet on those kinds of stocks. We don't go for the quick money and, even more annoyingly, we hedge – which means that, by design, about 1/3 of our position legs are losing at any given time.
It's boring but it works and it works consistently in up or down market – and that is what long-term INVESTING is really about.
Money Talk Portfolio Review: I haven't been on the show since December 9th, so no changes have been made to the portfolio, which was up 51% at the time and is now up 62.2% so right on track for a portfolio that's designed to make 30-40% annual returns. Again, it's all about consistency over the long-haul and this is a portfolio we can't adjust other than once per quarter on the show.
Also notice that $124,275 (76.6%) out of $162,205 is CASH!!! Cash is a great hedge and, the way we invest, we do not need to deploy a lot of cash to make a lot of money – especially in a bullish market – so why should we? Tying up our cash reduces our flexibility and increases our risk. We are able to use leverage instead to make very nice (but not spectacular) returns while keeping enough dry powder on the sidelines to take advantage of any correction – rather than taking cover and then trying to re-cover in the aftermath. THAT is how you win big in the long-run – by not losing in the short-run.
As with our LTP, these are the survivors, the positions we consider bullet-proof for the 20% correction we're expecting ahead.
- IBM – We rolled down to the $110 calls on a dip and we're still waiting for a nice rally. It's a $24,000 spread at a net $40 credit and it's $8,000 in the money on the call side. The short puts are aggressive but, if you don't mind owning 400 shares of IBM at $135 ($54,000), that's your risk and your potential reward is making $24,040 if IBM is over $135 in January. That's the leverage we use. If you bought the stock at $120.73 ($48,292), a 12% gain would be $135.22 ($5,796 gained on 400 shares) and, at $100, for example, your loss would be $20.73 ($8,292). With the option trade, at $135 you make $24,040 and, at $100, you lose $13,960 so the risk is really just $5,668 more but you are not tying up $48,292 (there is margin, of course) to make it. That's the logic of our whole system in a nutshell and we're up $8,020 already with another $24,040 left to go!
- INTC – Our new trade from the last show. Already deep in the money it's a $25,000 spread at net $10,425 but we bought it for net $2,075 so we're already up $8,350 (402%) against our cash outlay and there's another $14,575 left to gain but that's "only" a 139.8% from the current net so – yawn…
- M – Way over goal on this $15,000 spread but only net $10,675 so $4,325 left to collect by January.
- PFE – That one is from our previous appearance in October and surprisingly flat so you can still buy this $7,000 spread for net $0. You are obligated to buy 500 shares of PFE at $35, so that's the downside. The upside is $7,000 left to gain.
- SKT – FINALLY took off. Unfortunately, we covered at $10 so we don't care how high it goes, we get $10,000 at $10 or more and the current net is $7,735 so only $2,265 left to gain. If we needed cash, we would kill this one as the return is boring for 2 years and they are not paying the dividend at the moment.
- SPWR - Took a big hit this week so now only 260% higher than we need it to be. It's a $10,000 spread at net $9,135 so no real point to keeping it with only $865 left to gain but, again, it's perfectly safe and we don't need the margin it's using.
So there's $53,070 of anticipated gains and we only have $37,930 in positions – that's a pretty good rate of return. Even as a brand new portfolio, this will outperform pretty much anything the market is likely to do over the next couple of years but, oh boy, is it BORING, right? We don't even make adjustments to this one unless we're on the show – about once per quarter. Sorry to be so dull…