In Search of the Perfect Investment

Yesterday I lost more money on the stock market than on any other single day.

It was the third day of a tech stock downdraft in which I’ve “lost” an amazing amount of money. “Lost” meaning on paper. I’m still way up on the year.

Learned Wall Street gurus are making major bets on how long this downdraft will last. Some say it will end this morning. Futures are up. Others say they have no clue. There are too many variables — the election, the economy (with its death of so many industries, like retail and tourism), huge unemployment and the virus.

These are not usual times. We should expect continued volatility.

I’ve been pushing tech stocks for months. I now look somewhat foolish since tech stocks have taken it so hard on the chin. But, look at this chart. It compares tech-heavy Nasdaq, versus the Dow, versus the S&P 500 this year. Though tech has fallen hard, it’s done far better this year than the Dow and the S&P 500. It’s still way up.

Pricing of tech stocks had gotten out of hand. Here’s an explanation from Joel Ross of the Ross Rant newsletter:

The blip in the stock market (that’s the last few days) was not unexpected as we now know the last part of the run-up was powered by a combination of Softbank buying $4 billion of out of the money calls, a rush of amateur money into FANG stocks and options by Robinhood investors and general momentum investors. The $4 billion calls controlled $50 billion of stock so that the sellers of the calls most likely bought $50 billion of shares to cover their position. While I still believe the big stocks are not over priced on a long term view, their prices had gone up too fast to be sustainable, and a correction was inevitable.

In short, everyone — including me — got carried away by our genius of picking tech stocks — for all the reasons I’ve outlined a million times — especially the explosion of work-at-home technologies of Zoom Video, Amazon, DocuSign, Crowdstrike, Netflix, Shopify, Square, TelaDoc, and of course, Peloton.

Thinking back: When prices went completely crazy, I should have “hedged” some of my positions by selling call options. I would have taken in money for doing nothing. And the call options would have expired worthless.

Ross continued:

When there is a rush into out of money call options such as we saw this past couple of weeks in Apple and Tesla, then the seller of the call buys the stock to cover his position on the sale of the call. With Softbank and the amateurs flooding the option market for these stocks, the share prices were forced higher too fast. Now those options are valueless and possibly the call sellers were dumping their shares.  In any event, the drop in the market was not due to any economic or company specific issue.  It was purely due to market speculators and algos following along.

Things may be ugly and volatile for a couple of days, but should settle down later this week as some of the sideline investors with all that cash start to come in to buy at the lower share prices.

I’m not selling anything I own — except Tesla (too much craziness). I made the mistake of panicking and selling too many stocks during the March downturn, then having to scramble back in as the market started turning up.

Black Swan Events

Black Swan events are happening so often that we, as investors,  really need to plan for them. There are basically  two strategies:

+ Diversification, and

+ Cash.

You don’t want to be 100% in tech. We’re actually not. We own UNH, Costco, JNJ, Eli  Lilly, Nike, TSCO (Tractor Supply). And I own investments in real estate syndications.

In real estate there are wide diversifications possible — from location (invest in different parts of the country) to residential multi-family housing, to warehouses, and to office buildings.

The key is the 100-10-1 rule. Look at 100 opportunities. Bid low on ten. Buy one. Patience is key. It’s OK to be heavily in cash if you can’t find anything enticing enough to put your money into.

More about this in coming days.

My favorite place in the whole world

My friends tell me it’s now blessedly empty. Go for it. (It’s Yosemite.)

Second favorite place is Columbia County. This was the view yesterday morning from Mark Johnson’s tennis court in Ghent, NY.

The U.S. Tennis Open is playing on ESPN. Surprisingly good tennis, even though Nadal, Fed and Djoko are not playing.

And finally, my weekend reading. The most engrossing book I’ve read in eons — cover to cover. Number two on Amazon. Read it.

My Australian nephew Dan Whitten called to tell Australians are desperate to travel. But can’t. They’ve even closed the border between New South Wales and Queensland. That would be like closing the border between New York and Massachusetts and barricading it with armed police and military. I kid you not. The Australians are really serious about Covid.

My sister, Barbara Whitten, who’s the world greatest travel agent, is writing a magnum opus on “The 12 Greatest Places to Visit in New South Wales,” beginning with the Blue Mountains, which are 60 miles west of Sydney. She usually books travel to London, Paris, Rome, Berlin. For now local travel this will have to do:

Snowflake is going IPO — with Salesforce and Berkshire Hathaway each buying $250 million of the shares at the IPO price. You should try and get some too. I suspect I’m (as usual) too small to get any and only institutions will benefit.  The same old unfair story.

See you tomorrow — Harry Newton