Time for a New Strategy?
As I sat down to research for my stock presentation this month, I had a feeling I just couldn’t shake. "Should we really be buying more stocks right now?" I could hardly concentrate on the stock screener with the elephant of the economy breathing over my shoulder.
Business As Usual
From day one, our primary strategy has been “buy and hold”: the accepted wisdom that the stock market always trends upward when viewed over any long enough period of time
, and thus we only need diversify our portfolio and wait for our snowball at the bottom.
And sure, you can look at our portfolio
even now and point out that we’re technically “beating the market”
, but we’ve been consistently down for many months now, and our buying record during the downturn is particularly distressing.
So instead of going “business as usual” this month, I decided to do some research. And I didn’t want to just read the usual high-profile sources and headlines
, as institutional presence in the news cycle also has a rather shameful record
. After all, these people don’t make money when we hold onto our cash. So I sought more independent, contrarian
Buy and Hold Considered Harmful
I found one such contrarian voice in Mike Shedlock (aka “Mish”)
on his Global Economic Trend Analysis blog
. I’ve read a number of interesting posts of his, including a look at the suspension of short-selling
, the dangers of trusting institutional advisers
, and the incompetence of Bernanke
, to name a few. He frequently publishes high quality posts
, and he’s clearly not out to win any friends with the status quo; just what I was looking for.
One post in particular hits close to home with our humble club, and I’ve been rolling it over in my head for the past week. It’s called Long Term Buy And Hold Is Still Bad Advice
, and I urge all members to read it closely.
First, he contrasts our current style of investing (injecting money into the market at regular intervals over a long period of time) with “CD laddering
" (essentially buying a set of CDs staggered by year and reinvesting in long-term CDs as the short-term CDs mature.) He has the CD laddering method consistently beating the market over the long-term, and with less volatility
(at least in his somewhat contrived example.) Sure, CDs aren’t nearly as sexy or complex as playing the stock market, but this strategy really puts our strategy into perspective.
The really interesting part (especially to our young club) comes next, though. Consider this excerpt:
One simple, active strategy that would have avoided the stock market holocaust in both the recent recessions would be to get out of the market when the yield curve inverts and stay out until the NBER announces the recession has ended.
Using [this strategy] one would have exited the stock Market in Spring of 2000 and reentered in November of 2001. One would have exited the stock market in Summer of 2006 and would still be out.
If my memory serves, we actually studied
the yield curve and took note of its inversion
in an education meeting very early on in our club’s short history! In fact, we’ve discussed this at more recent meetings, but it seems like we are somehow impotent when it comes to making this information actionable.
Interestingly, Mish says that we should still be out of the market
, doomed to throw good money after bad until we know for a fact that the market is stabilized.
Regardless of what strategy one uses, it is a horrible idea to hold stocks throughout recessions.
One can’t help but cringe as they read those words…
On False Bottoms
So how do we predict when the recession is coming to a close? Mish has plenty to say about that too, of course, but I found another rare gem of a blog in the Field Check Group
. Managing Director Mark Hanson (aka Mr Mortgage)
posts only a handful of times monthly, but this information is priceless
. His expertise and focus is on the financial and real estate sectors, that is, the major players for this recession.
A recent must-read regarding the foreclosure situation is The Next Foreclosure Wave
, where Mark discusses the three indicators of foreclosure:
- Notice-of-Default (NOD)
- Notice-of-Trustee Sale (NTS)
What Mark and his group have realized is that foreclosures are very predictable when you watch the indicators. Where there are NODs, there will soon be NTSs. And where there are NTSs, foreclosures are sure to follow.
Graphing these indicators for 2008, our current economic crisis is clearly visible, but the wave seems to break around about September. Graphing the indicators for 2009 shows that things have only just begun, with the “second wave” dwarfing the first:
The Notice-of-Trustee Sales and foreclosures will continue to come. Notice-of-Defaults — the first stage of foreclosure and the earliest leading indicator of everything mortgage, housing and balance sheet related — have been hitting record highs since December.
The past 6-month NOD average is 45k…the 6-month average for the worst time in the summer of 2008 was only 43,500.
The subsequent foreclosures that come from this latest 6-month NOD surge will hit about the same time a mortgage mod re-default surge from the 2008 NOD surge does. At this point if new NOD’s have leveled out or even fallen by 50%, the re-defaults from bad loan mods made when mods were new and even more reckless than today will keep foreclosures as headlines through next Spring at least.
Next Spring at least?!?!?
This is serious stuff, and I suggest you spend some time pondering that post with all of its lovely-yet-damning graphs. It truly seems that real estate has only just begun to weigh into this recession
Never Too Late to Adapt
In conclusion, I would like to encourage that we take the long view. Let us not hope for things to get better or return to normalcy, but rather let us assume that things will never be the same again
. We’ve been down for so long that I fear we have become complacent. But there is money to be made in any market
, so we should take this opportunity to adapt to investment in the recession.
Instead of simply “buying through the downturn” and relying on the diversity of our stock picks as a hedge, I would like to see diversity in our investment strategy. What other investment vehicles do we have at our disposal, stock market or otherwise?
Here are some ideas off the top of my head I’ll mention to get the gears turning:
- foreign exchange trading (get the jump on the dying dollar)
- CD laddering or treasury strategies (“beats the market with less volatility”)
- re-evaluation of our policy on shorting (we don’t currently allow it)
What investment vehicles are you interested in utilizing to survive in a prolonged recession? As always, your thoughts are welcome in the comments.