Foot off the gas — 29 January, 2020

I am selling off individual company stock positions, of which I still own a few, as they move back up into profit territory and then moving that capital into the iShares S&P 500 ETF (IVV).

The goal is to have the full 30% of my portfolio currently allocated to stocks to achieve the full exposure through the index. Unchanged is a 5% gold (GLD) hedge, but now I’m 65% in a short-term US treasury ETF (VGSH) after selling out of my Moderna (MRNA) holding, which seems to be trading lower since I exited the position.

My portfolio (29th January, 2020).

Let’s look at why I’m positioned this way by considering the Buffett Indicator below (total US stock market as a percentage of GDP).

As you can see, the market is now anywhere between 155-160% of GDP. That contrasts with dips after 2000 and 2008, when the market, driven by fear, became over sold and investors like Buffett had a jolly old feast.

Buffett Indicator at 155% suggests the market is extremely overbought.

While I don’t pretend to know when sentiment will change, I would rather limit equity exposure to 30% of my portfolio and accept some upside risk in the 11th year of a record-setting bull run. I’m taking Howard Marks’ advice to:

1. Understand what part of the cycle we are in (hint: very late), and then;
2. Position my portfolio aggressively or defensively based on what’s probable in future (simple risk-reward).

I intend to begin amassing a large mountain of dry powder in short-term treasuries so that I, like Buffett who is now sitting on record amounts of cash equivalents, can go on a feast when the time comes. This could mean I under-perform for months or even years while I amass a large cash equivalent position.

One day, it will feel strange to be excited when the market goes on sale, while most retail investors panic at the sell off (most will probably be heavy into equities purchased at astronomical prices by then).

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” — Warren Buffett

Even if it’s a small correction of 20% that is short lived, I’ll nonetheless be able to move in with substantial firepower to position my portfolio to outperform the subsequent months and years. In the meantime, I am still capturing 30% of market gains.

To position myself correctly given where we are in the cycle, I’ve used public data on Berkshire’s cash (equivalent) positions historically to build the following rough template for my bonds-to-equity allocation in early, mid, and late cycle:

• Early cycle
  • Buffett Indicator at 60% = 10% cash equivalent position
  • Buffett Indicator at 80% = 22.5% cash equivalent position
• Mid cycle
  • Buffett Indicator at 100% = 35% cash equivalent position
  • Buffett Indicator at 120% = 47.5% cash equivalent position
• Late cycle
  • Buffett Indicator at 140% = 60% cash equivalent position
  • Buffett Indicator at 160% = 72.5% cash equivalent position <— currently here

Thoughts on Positioning in the Cycle – 27 January, 2020

My current thinking is to construct the following portfolio:

1. 65% short-term treasuries (BSV)
2. 30% stock (currently fully allocated to Moderna for now)
3. 5% gold (GLD)

The thinking behind this incorporates the following considerations:

1. 10th year of bull market in the US (longest in history)
2. Buffett indicator at 157% (of GDP), the highest since 2000 and 2008
   1. Buffett is personally at $128 billion in cash/cash equivalents and rising, which is over 60% of his public equities portfolio. While I appreciate the argument can be made that it’s the size of his portfolio that is the challenge rather than availability of pockets of fairly priced equities (arguably like Berkshire itself), it still points to record-high valuations
3. Howards Marks suggesting defensive portfolio positioning at present
4. When recession does come, there are record amounts of dry powder on the sidelines, unlike in 2008 which was a liquidity-driven crash, meaning a recovery could be swift
5. Potential for inflation to rise closer towards Fed target and therefore for rates to rise
   1. Short-term treasuries seem better than cash under these circumstances but also less volatile than longer-dated bonds
   2. The gold hedge also helps with macroeconomic/political and inflation risks

Overall the excitement from holding a growth stock adds dynamism to this otherwise low-growth but stable portfolio. Hopefully it is enough to satisfy my craving for a bit of fun from investing while de-risking my overall exposure given where we are in the cycle – and therefore what is probable if not certain in future.

Why I bought Moderna (Nasdaq: MRNA)

It was two hours before market open on January 22nd and I had decided to reduce my portfolio diversifications in equities and go for larger conviction position(s) in 1-2 stocks. I had been thinking about this for the past few days, and was originally planning to move heavily into Vir Biotechnology (which has since done well).

I saw the above tweet from the CNBC news anchor and decided to move heavily into Moderna, also given the stock’s positive reaction to the news in pre-market trading (it was up 7%).

I put about $21,000 into the stock at market open and it continued climbing to nearly 11% before finishing the day up only 4% (meaning it had fallen 3 per cent since market open). Since then it’s been falling about 2% each trading day.

Given the severity of the coronavirus situation, and the fact Chinese New Year the same weekend would mean 3 billion trips in China, I expected things would get worse before they got better – and I thought this would provide momentum to the stock over the next week or two.

So far I have been wrong, despite all seven analysts covering the stock giving it “Buy” ratings. What I didn’t expect quite so soon was a handful of other biotech stocks also making headlines with work towards a coronavirus cure (including, alas, Vir Biotechnology, which on balance is probably the more attractive stock given its backing by the Gates Foundation and more upside if you believe the Goldman analyst covering it).

Hopefully going in my favour is the price, which is still below its post-IPO peak of May 2019. However, this doesn’t mean it will return to those heights and – while I won’t be selling this at a loss – I could be left holding this for months or years if it decides it wants to go lower before testing previous resistance levels at $28.

Not that it would have stopped me at the time, but looking at the stock now I can see that hedge fund holdings and insider selling, in addition to fundamentals, are all concerning. Going in my favour remain analyst ratings, blogger opinions, TipRank investors, news sentiment, and technicals. The stuff going against me is concerning.

“Experience is what you got when you didn’t get what you wanted.” ― Howard Marks

The good news is that I now have a few options to de-risk by moving to a Ray Dalio-style all weather portfolio, with:

1. My Moderna holding providing the 30% equity exposure such a portfolio requires.
2. Adding 40% long-term treasuries (I already hold 5% of my portfolio in long-term teasuries), 15% short-term treasuries, 7.5% commodities, and slightly more gold (I already hold 5% of my portfolio in gold).

Of course, Moderna may come back in the next trading week and I may be able to sell at a profit. Either way, it doesn’t really matter – what’s more important for me is clear hindsight on what motivated me to take the position.

Clearly, it was hope of a two-week buy and sell with a quick profit on the back of the coronavirus news. As with most retail investors, this has proven risky and may not end up being a particularly profitable trade. It’s hard to time short-term positions.

Which means I am left with experience – and hopefully not permanent capital loss so long as I hold and wait for a recovery in the comings months and potentially years. The experience I gained may prove even more useful than a quick profit as a result of getting lucky on the trade but without really smart process behind the original buy decision.

If you love investing, as I do, it’s all fun – even the set backs are fascinating opportunities to reflect and learn.