I'll start by both praising and criticizing the recent chest pounding of value investors. Clearly, you were right about Fed tightening compressing multiples and hitting hyper growth stocks first. I did figure it out because I purposely pay attention to people who have the opposite view of mine. The criticism I have of value investing can be best expressed in a story. I recently stumbled on a video of a value guy from May 2012 doing DCF analysis on Disney, which was trading at $44, and the 10-year yield he used as the discount rate was 1.79 at the time, so the discount to book value price he came up with was $40, therefore he said he would never buy Disney because it was overvalued. For technicians, on the chart Disney was breaking out above three long-term technical peaks around $42. Last March Disney was up nearly 500% since then (not including dividends). You could sell right now 30% off the highs and still be up over 300%. And that's just one stock. Apple split-adjusted is around $36,000, and it's not likely it fit in any value investor framework for many years unless you broke the rules like Warren Buffet did. If digging through the dredges for near bankrupt companies trading below book value works for you, then have at it. I would never succeed at that.
I like clearly established megacap tech companies with huge growth potential and eyes on the metaverse. That includes APPL, GOOGL, MSFT, AMZN, TSLA. I've always irrationally hated NFLX. I think FB will be good in the long-term, but I'm too worried about the issue with Apple in the short-term. I like Disney for its metaverse potential and think Omnicron and the Fed is offering a good buying opportunity, although I happen to think the upcoming short-covering rally will fizzle so everything has lower to go, but who knows. My guess is TSLA revisits the $600's and then 10x's from there. I expect megacap tech to double from here. It's just likely to go down a lot more before then. In smaller size I also like RBLX and U, and other metaverse stocks that have taken a beating.
Here's another reason value investing doesn't work for me. Twenty years from now after TSLA has grown 200,000% from inception like Apple did, and they have so much cash they're buying back shares and distributing dividends, and the P/E ratio is like 20, it will finally pop on the radar of value investors scrapping the barrel for safe dividend yields. Valuations are misleading. Here's what matters:
1. Is the business meeting or exceeding growth expectations? (Meaning, are you right that you bought a world class business that is expanding its market share and TAM.)
2. Position size.
3. Time in the market.
4. Outside income to dollar cost average.
5. Cross-asset and cross-strategy diversification.
What you want is a balanced portfolio that can weather different market regimes. The problem with balancing bonds with tech is they both go down when rates rise. Value stocks will hold up better than tech, but when the market really gets hit all correlations go to 1, and the idea of beating a benchmark because you lost less is absurd if you don't have clients to appease. You can sell into strength or rebalance in a tax deferred account, but the reality is unless you're good at trading, which requires a specific skill set, and the dedication to put in the time, most people are better off not making decisions. The only thing you can control is how much you're willing to risk and then gauge the probabilistic drawdowns based on your portfolio construction, and be aware of what market regimes will hurt or help you, and make adjustments, or put on hedges, accordingly (although that's decisions). The number one rule in investing and trading is you have to know how much you're risking and then deeply accept that risk. If you're risking too much you find out at the worst possible time.
The worst case scenario for nearly every portfolio construction (and how this entire bubble blows up) is when the Fed loses the ability to ease because inflation is spiraling out of control. I happen to think both camps are right about the current situation. It isn't fair to call it transitory, but it also isn't going to last because it's mostly supply chain problems that will self-correct, and the bond markets are saying this. There are two concerning elements, though.
1. The labor gap seems to be largely caused by boomers retiring to avoid Covid risk, which is creating upward pressure on wages to fill those positions. I'm not sure if they will come out of retirement or not when this is over. Wage increases that level off will cause price increases that level off. But if the boomers stay retired for good, it could be a longer-lasting change.
2. If the long oil crowd is right about the lack of capex leading to reduced supply, then a reopening economy going back to full tilt will keep upward pressure on oil, which is fine as a trade, but it's as dumb as being short bonds for any length of time because the success of the trade causes its own demise. Higher rates and higher oil cause lower rates and lower oil. In comparison, Apple is $36, 000 a share because its success causes more success.
I want less decisions in my life, so the more I can buy great businesses with a time frame of forever and with size I can tolerate drawdowns and dollar cost average, the better. It's unfortunate that I developed decision fatigue and realized this after the market doubled in 18 months, so I'm being cautious because dealing with drawdowns is not my speciality, but that's because size in trading is way different than size in investing, which I've already learned the hard way. I also suffered from mixing up time frames doing both myself, so I gave half my money to a broker friend for investing, and half I'll have for shorter-term or opportunistic stuff.
Now that the market making banks stole billions from option buyers by crushing the market into OPEX, maybe we get an oversold rally. I personally think any rallies will be hard to sustain due to lack of conviction and emboldened shorts in a rising rate environment, but as long as the Fed doesn't surprise hawkishly, it would make sense to chase shorts out before rolling over again, especially into earnings. Personally, I'm thinking of waiting until the first rate hike. We'll see.
This market seems like it's not a V bottom kind of market. Obviously, anything is possible, but it sure seems like there's not much fear of missing out, so before I get fully invested, I want to see a double bottom, or a clear reversal hammer on the weekly. It sure seems like it can go a lot lower. Another way is waiting for a downtrend line to break for several days and then buy weakness. If your time frame is 5-10 years, then why fret over a couple of percent? A trick I've used on shorter time frames is picking a spot on the chart that means the bottom is likely in, and then waiting for it to cross over that area, which is usually a breakout of some sort, then waiting for weakness because breakouts never work in stocks. You do miss out on some gains, but you also avoid a lot of fake-out rallies that go south before you can finish a sandwich.
Everyone is looking for an answer and there isn't one. What you realize at some point is the worst thing you can have is an idea because if the market goes in your direction you will feel like you are right when you might be, but those are two separate things most of the time. And when the market goes against you, you'll end up not wanting to sell and miss out on your thesis, which can turn into deep trouble. How much are you risking? After you make both mistakes enough times, or misjudge a market regime, or get blindsided in one way or another, or your thesis doesn't work out, what you figure out is that it's best to be balanced and never risk too much in one thing, except I must admit I do agree with the notion that once in awhile your perfect pitch comes along (and it's different for everyone) (one for me was Oct Opex), so that is the time to swing for the fences and be aggressive. The rest of the time it's more important to figure out how to keep the gains. At some point in the future, and I'm currently thinking it's years away, the Fed's hands will be tied and the market will once again go down 80% and erase a generation of gains. That's what happens in debt-fueled markets. I like the idea of thinking about how you would construct a portfolio that lasts 100 years with no changes. Usually, lessening drawdowns means giving up some upside too, but how do you make it through the waterfalls?
