What I’m Buying Every Week for the Next 6 months ( And Why)
These are uncertain times.
If you have read LINK THE SRM GUIDE TO INVESTING then you should be as excited as I am for the barrage of opportunities that will pop up over this year.
Turmoil in markets and politics increases volatility, and thus furthers the chance that people will get excited and over/underprice things like Stocks, Real Estate, businesses etc.
We are entering an era where a savvy investor can easily double his net worth in the coming years, potentially even more.
First Principles of Investing in a Crash
There are a lot of things at play here, not just the virus, not just American politics. It makes sense to have an overview here of how I’m thinking about the current situation. It’s this mental framework that enables me to make broader predictions in the markets and have more certainty in the choices I make.
What i’m interested in is not the likelihood of an event happening but the ODDS on it. What this really means in terms of the stock market is that you should buying things by the multiples you could be earning.
This is a fairly complex idea, and I recommend you read further into it if Odds and payoffs aren’t intuitive for you.
Coronavirus market panics are an overreaction and everything will be ok (ish)
A lot of stocks have been absolutely decimated in this media newstorm about the coronavirus. Shutdowns are everywhere, people are staying indoors and millions are out of work overnight.
It’s certainly a horrible time, but in people’s ultimate pessimism regarding the virus, many stocks have been sold for no good reason. Many sectors are being completely written off as losers for the year.
While this may be true if lockdowns persist, it’s unlikely that they ALL will be massive losers of earnings to justify their preemptive stock declines .
The Oil Price War Won’t Last Either
If you glance through the headlines you should see some articles talking about oil at 5 year lows, price waars Saudi Arabia and Russia, and general chaos with the US oil drillers.
Oil is at a multi-year low, and it’s a commodity that will still be in demand in a year from now and beyond. Once the production levels are reduced, the price will likely rise back up to where it was trading prior to the conflicts + virus. Meaning a 3X return for an investor that can sit tight in a long position.
Chain of debt and default waves
Americans have more debt now than ever. There are record accumulations of student loans, auto loans, credit card debt.
It’s safe to say that many are living overleveraged lives without a bunch of cash in the bank. Now couple that with massive unemployment due to the virus shut downs? The result is a whole bunch of Americans that can’t afford to pay their credit cards or even their rent.
Evictions abound, landlords lose money, people lose their homes to foreclosure etc. etc.
My theory is that the defaults from such a large number of americans will cascade upwards to the people that lend the money (the banks and corporations).
If this happens, what’s likely (and already happening) is that the government will not let most of these busiensses fail and will lend people the money. The way they do it is by virtually printing a ton of money and passing it out.
If you want to read more on the economics of this, check out Ray Dalio’s papers on the subject of Monetary Policy
The bet I’m making is that this INSANE amount of dollars will lead to increased inflation, possibly even hyperinflation of basic goods and commodities.
Put this in place with massive declines in oil and ‘uncharastic’ declines in gold among this virus panic to me signals and underpricing/mispricing of both gold and oil.
In the event of inflation, the people of America will absolutely lose their minds and make things worse.
This isn’t Argentina, we aren’t used to seeing our currency waiver at ALL, so if it does believe me people will be running for the hills. In my opinion this means gold for the older generations and crypto for the younger generations.
People will rush to put their money into both these things to save it, and in the process drive the prices up further (and then chase after the prices).
I thought gold and crypto were ‘hedges’ against uncertainty, why are they down now?
Great question, my friend. Values of currencies are insanely complex, but here’s my theory on it.
People are incredibly fearful, and they should be. According to the media we’re all fucked (we might actually be), and people are more leveraged than ever before in their businesses and everyday lives.
So in times of fear like this, people don’t run for cash towards gold, they run from their investments to CASH. The US Dollar has rallied like crazy these past few weeks because people are trying to get liquid and unwind their positions (crypto and gold included).
This could be because they’re in big trouble and need to meet margin calls (trading debts), or maybe they are looking forward to opportunities in cheap stocks and want to have the cash on hand to buy equities.
I’m not buying gold and crypto because they move in lockstep as a ‘hedge’ to the market. I’m buying them because they’re sound money and ultimately they are always priced correctly EVENTUALLY.
Which Stocks to Actually Buy
So now that we’ve established the premise for what investments seem to have the best odds of success (oil, crypto, gold), we need to make our bets.
Buy the Thing
Physical Gold bars/coins, or if you want a more liquid instrument buy BAR on the stock exchange.
In addition to physical gold, I’m interested in buying the Gold Miners that are int he best shape financially (most likely to survive a crisis) and pay good dividends.
So you can diversify and buy the miners indexs GDX and GDXJ, I’m also looking at the Major gold producers like Barrick (Ticker GOLD)
The logic here is that regardless of coronavirus or not, these miners are still going to be digging up and selling gold. Thus, they should not have slid with the rest of the market as far as they did.
In 2008, it took gold awhile to start moving as you can see from the chart, so we might be waiting around awhile. That’s why companies with good finances and dividend payments are ideal here.
Oil hasn’t been this cheap inYEARS and it’s due to a price war. Supply will drop and prices will go back up.
Plus if there is inflation, commodity prices rise with it and thus oil will too.
The risk here is buying oil producers that go bankrupt due to the drop in demand and low oil prices. You need to pick the most likely ones to survive and spread your bets. Ideally while collecting a dividend throughout the year.
You are spreading your bet even further by buying the commodity oil itself. Crude oil can’t go ‘Bankrupt’ it can just rise or fall in price.
Is this the bottom? SHould I wait for prices to fall further?
Let us consult the great Howard Marks, master of Market Cycles and a market legend. In his most recent letter to clients (I highly suggest you subscribe to them) he puts this simply.
It’s not a bad time to buy, but it might turn out to not be the absolute best.
No one can know the bottom until it’s already happened.
(Pick up a copy of his book, it’s worth the read)
Marks is spot on here, there is no way to know if this is an ideal time to buy, but we can be quite certain that it’s a pretty good time (even if it may get better). That’s why I’m only buying some, and not betting the farm just yet.
The only way to mitigate this uncertainty about where things will go and what will happen, is to:
- Identify things that you think are undervalued now (we did that, oil/gold/miners/crypto)
- Buy them.
My buying plan is to continue to buy on a weekly basis with a high percentage of my income. If you have a safety net of cash of at least a few months expenses, I recommend that you do the same.
I have no idea what will happen, no one does. But based on a fundamental knowledge of economics and market histories, I can say that Gold/Miners and Oil/Producers (and a little bit of Bitcoin) are underpriced due to the current market turmoil. Whether things go ‘back to normal’ or we face serious economic implications down the line, I see them all prospering and rising in value significantly.
For further reading, see all of Howard Mark’s Memos at Oaktree Capital. I will put up a post wit the best finance books too that are relevant in a time like this.
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