The Growth Portfolio we manage for our investors and Members ($55m) has outperformed over the COVID-19 outbreak. For us COVID-19 was not a disaster, the volatility it caused proved to be a fabulous opportunity instead. And as the market fell over on Thursday and Friday last week (11th and 12th June 2020) we see another fabulous opportunity beginning - and as of Friday, we are "All out".
The Marcus Today Growth SMA as of 10/6/2020 had outperformed the ASX 300 Accumulation benchmark by 26.87% since the coronavirus hit on February 20. It was up 19.19% in a year when the All ordinaries is down 4% and was up 36.61% from the bottom on March 24. It is now in 100% cash.
How have we outperformed? And why have we locked it in? At the risk of letting out our Secret Herbs and Spices, this is how and why. Twenty Ways to Beat the Herd. These lessons are not for everyone, most fund managers are too big to do this, but for a $55m fund like ours, and for private investors that are not shackled by liquidity issues and an Ivory Tower Committee that never decides anything, this is something to pin on the fridge.
How to manage a portfolio in volatile times. In fact, all the time. This is working:
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Putting your investors first. They are the only thing that matters. We are also invested in the fund we manage so essentially all we are doing is looking after ourselves, everyone else is along for the ride, in the same boat, we are all, manager and investors, 100% aligned in our interests. So we do with the fund what we would do for ourselves. Any fund manager not invested in the fortunes of their own skills shouldn't be on the job.
- Having the ability to go to 100% cash. Most fund managers can’t. The good news is that individual investors, can. Institutional fund managers would kill for a lack of liquidity issues. It is a private investor's biggest advantage over a fund.
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Being brave enough to go to cash. Most fund managers
won’t even if they could. We went to 100% cash when the market looked like collapsing last
year. It was premature but it taught us to be bold and it paved the way
to do it again when the coronavirus arrived and the market became
precipitous once more. We went to 70% cash on February 20. We fully reinvested on March 24. And we've just gone to cash again - 100% this time. We're booking the profits and letting the market settle down for a moment.
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Working as a small team, not alone. You need bouncing
boards, other intelligent, engaged people on an assortment of wavelengths.
People who are objective, are not easily intimidated, and speak freely. People who can harden your resolve or question it. Working alone means more mistakes. Too big an investment
team constipates the investment process, lengthens reaction times and creates a
hierarchy that mutes ideas. You need something in the middle.
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Being unemotional. It takes a lot of experience to be truly
objective. If you ever 'love' a stock or 'hate' a stock, you’re missing the
point. You can't invest on 'feelings'. Think more like Spock, and less like Romeo & Juliet.
- Seeing every moment as an opportunity. They say "Never waste a good crisis". Volatility provides opportunity. When the herd is charging around, that's when you get off the sideline and play harder, not back out, which is the usual reaction.
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Not focusing on the long term all the time. Long term bottom-up stock picking doesn’t work all the time. Don't end up being one of those buy and hold nuff-nuffs. Its blinkered.
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Putting asset allocation before stock picking when necessary. Sometimes the whole market moves and you have to do something about it no matter the quality of the stocks you hold. You can always come back later, hopefully when the same stocks are cheaper.
- Not making grand (unmakeable) predictions about the future. This is how some investors think the market works – it is not. Its called guessing. React don’t predict.
- Not ever thinking or saying “Its OK it’ll be alright in the end” (Did your adviser tell you that?). It is a professional cop out. It means "I don’t know what to do, I know you’re paying me an annual fee to handle your investments but my speciality is superannuation legislation not timing shares, and please don’t sell, it took so long to get you to buy something, I don’t want to have to go through that whole process again, and if you do sell I have to do all this profitless unpaid admin just to lose my fees, and anyway...don’t you know you can’t time the market, everyone knows that....don’t they?”
- Stock picking on themes. Investing in themes works. There are tides in the stock market, lots of them. Swim with the tides not against them. Get the themes right and the stocks pick themselves.
- Watching the herd not joining the herd. An innocuous sounding motherhood statement. But this is the key to success in volatile times. Spotting the herd's change of mood requires you to have your finger on the pulse of the market, all the time.
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Knowing that at times the quality of the stocks you hold will not make any difference if the market collapses. King Canute is famous for a reason. Because it doesn't matter who you are, what you hold, the market doesn't care, it will still run you over.
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Being decisive. Being bold. “Be bold and mighty forces will come to your aid” (name that film). Volatile markets are not for the timid.
- Making decisions fast. In a world of high frequency trading, algorithms, computer driven trading and the new one, ETF selling, you don’t have as much time as you used to. One of our Members posted this on Facebook for our other Members. When precipitous moments come, do something.
- There is never a rush to buy. Confidence is three times harder to generate than fear. Some people embarrassed themselves calling the bottom of the February correction after a week. Corrections start fast and trend. Believe the herd even when they sell quickly. They are bigger than you are and prone to hangovers.
- Being flexible of mind. Don’t get set in your opinion. Don’t be a bull or a bear. It suggests a pre-conceived inflexibility, which sets you up to be wrong half the time. You need to move with the herd, not put a stake in the ground. The stampede won't stop for you.
- Sell easily. Most investors find this very hard having been indoctrinated by the sanctimonious Buffetesque sycophants that investment is about fundamentals and the long term. Its like a misguided delusional religion. Although the more misguided people in the market the better. So please...carry on.
- Being Hyper-vigilant. Re-assess every setting all the time. Or just read the Marcus Today newsletter every day! We’re doing all the thinking for you and putting it in the daily Strategy Podcasts.
- Being nimble. You can’t do that when you run billions. We run millions not billions. Not having liquidity issues is one of the private investor’s great luxuries. Bobby Axelrod couldn’t do what we’re doing.
- Not holding the ‘Moron Portfolio’.
I remember a time in the Tech Boom, in a morning meeting at the top of the market, when Andrew Bell of Bell Securities, interrupted the morning meeting frenzy of tech ideas and just said “Stop, everyone. Just stop. Look around you. You (pointing at a young dealer) did $11,000 of commission yesterday. A year ago you were selling mobile phones. And you, you just employed a dealer’s assistant. A year ago you were a dealer’s assistant. So just stop and look around. It doesn’t get to look any better than this in the stock market”. It was the top of the Tech Boom and the Tech Wreck was just about to start.
And as the market reverses once again the time has come to do something. Which is where so many fund managers and investors go wrong. When the going gets tough, they do nothing.
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Trevor Myers
Always a must read. Thanks Marcus.
Marcus Padley
Thanks Trevor - we're doing it again today...cashing up. Nimble, Flexible, Bold...hopefully that doesn't appear on our gravestone!
Marshall Perron
Im delighted to read a confirmation that my theory and practice has merit. In February 2008 against the advice of my financial adviser I decided to sell 100% of my shares and drop them in bank term deposits then offering 8%. 12 Months later I commenced buying back in. I earned 8% when the market lost 40%. This March I again sold every share (a little late, lost 12%) before I acted and started buying good companies once they had fallen 20% or more. I'm currently up 32%. It seems to me if you are pretty certain a share you own is going to fall more that the transaction cost of selling and buying back in then it is worth doing. As you say an individual has the advantage of deciding to 'cash out' and execute the action as quick as pushing a button. Im delighted to read you agree.
jeff sampson
Marcus, thanks. Robust, authentic advice and a ripping read to boot. Good lessons for life in general, actually. As Spock would say, don't Cling On.
Param Singh
another excellent article Marcus. I have a confession to make, when you wrote "that" article around 20th March that you are "all in", I couldnt stop laughing at your "stupidity", I was convinced that you will get annihilated... It took me a long time to come to terms with the change in market... that whole experience helped me in growing as a trader/investor and the things I did wrong, most of all not even considering that the bottom could be in... as you say being neutral...all in all I have a lot of respect for your opinion and also the fact that you have the courage to put it out there what you are doing with your portfolio... kind regards
Neal Whittle
Hi Marcus, I have only just discovered you, look forward to hearing more of your insights, the 'Buffetesque sycophants and their misguided delusional religion' certainly gave me a laugh! Best wishes, Neal.
Andrew Gibson
Well written Marcus.
Scott Andrews
Pure gambling
Greg Cathro
Good thought provoking article. Just a couple of thoughts. 1. Your Timing has been perfect. Can you do that all the time? Perhaps its the 'secret herbs and spices'. 2. Can you have 1 or 2 stocks not worth selling whatever the herd are doing? Have held CSL for many years through all cycles. 3. Tax. Depending on your marginal tax rate and purchase date you may lose the non-discountable CGT portion on some shares that negates a significant part of the opportunity. Maybe I'm misguided but I might find it difficult to go to 100% cash, maybe 80%.
Darrell Lynch
Great to read a different perspective. When I read you were ‘all in’ I started buying. Thanks.
Marcus Padley
Hi Scott - I was on ABC Radio recently. They were talking about the boom in online broking accounts that CommSec are reporting and ASIC is warning about (being conservative is their job). Of course there’s been a boom, everyone’s looking for something to do in isolation plus we are in the middle of a rare once in a decade buying opportunity. Whilst I was on there, in the three minutes the journalist in front of me had to speak he managed to use all the following expressions when describing private investors trading the stock market: Gamblers Don't know what they are doing Lambs to the slaughter Pure Luck Losers Haven't got a chance Swimming in shark infested waters Day Traders Same odds as horse racing Not very proficient They all buy at the top sell at the bottom Dumb Really? The journalist was one the countries best-known finance journalists. Note journalist. He has probably never traded a share in his life and from that viewpoint he dismissed all investors as idiots. We just made $20m for our investors using skills developed over 38 years investing in the market and you've dismiss it as gambling. Really?
Marcus Padley
Thanks for that Param....Time will tell if this is genius or luck. I'm guessing its a bit of both!
Marcus Padley
Hi Greg (1) Yes :-) (2) Of course you can - but sometimes the market takes everything with it, good and bad, and you have to respect that. (3) Not allowed to give any tax comments.
elizabeth martinengo
what is the name of your etf? do you constantly buy and sell?
Marcus Padley
Hi Elizabeth - Our fund is not an ETF its what is known as a Separately Managed Account (SMA) which allows you retain the beneficial ownership of the shares whilst we direct traffic. In other words you hold the shares and retain your own tax status (its not mixed with everyone else's in a unit trust). That means we could go bust and you would still be holding the shares. You can see what you hold with 24/7, total transparency, through the login we give you to the SMA Platform run by Praemium. If you'd like to know more paste the link below into a browser - Hope that helps. If not email sma@marcustoday.com.au - https://marcustoday.com.au/funds-management/about-benefits/
David Heath
Great commentary as usual. What should individual investors do? Your comment "indoctrinated by the sanctimonious Buffetesque sycophants" rings a bell. Another ideas/suggestions Don't invest or invest very little in the Australian market - too small, too conservative with a large CGT headwind (not even protected for inflation now). As an example last 13 years - ASX down 5%, Dow up 90%, NASDAQ up 260% - as you say don't fight the herd. Over 30 or so years the NASDAQ is up 60X - impossible here in Australia. Thanks again for the excellent commentary.
Frank Bradicich
Great articles Marcus, you continue to share your valuable know-how, it isappriciated.
Bruce Growcott
Hi Marcus I invested on the 23 March based on your call ....thanks !!!!...yesterday I just couldn’t bring myself to sell , despite my respect for your writings and today has been rewarding .... In general how quickly might you take your whole book out of /back into the market ... thanks Bruce
John Boardman
With the market up 4% today (16/6/2020), you are perhaps feeling a little bit nervous tonight about your call to go 100% cash. No doubt you are confident with adopting a defensive position to go straight to 100% cash in one day rather than stagger it over a few days. Did you go straight to 100% cash in March 2020 or did you stagger it over a few days as the market moved lower and lower, as each day passed?
Mark Cardell
So on Friday 12th June you put your investors into 100% cash and they then missed the gains on Tuesday the 16th? Here's my two tips you can add to your 20 21: Don't fight the Fed. 22: Avoid hubris
Brian Kelly
Very interesting Marcus, for mine the obvious question is why the 9th? Was it a technical signal? Cheers
Justin Smith
Oops! Wasn’t the market meant to be going down? Statistically it’s been proven that market timing is a long term losing strategy. Yes you’ll wing it and be right sometimes but most of the time you’ll be wrong.
Marcus Padley
Hi Bruce - We did most of the selling in a day this time, it looked that precipitous, sell signals on everything in a day. We have talked about it, its easy in hindsight, but having sold tech stocks on the Monday prior on the signs they were individually rolling over the top (a bit earlier than the rest of the market), we reckon as the fund gets bigger that spreading it may be necessary to ease the liquidity issue - so in future we might indeed spread the selling over a few days.
Marcus Padley
Hi John - In March we went to 40% cash on day one then 70% cash day two and that was it - we didn't completely cash out (in hindsight we should have - easy in hindsight).
Marcus Padley
Hi Mark - Thanks for your dazzling Wisdom in hindsight. Try telling the marketing department of a fund manager that they should exercise hubris. You've outperformed the stock market by 26% in three months but you should keep quiet about it. Its not commercial.
Marcus Padley
Hi Brian - Yes and no. We've been doing this for a while and occasionally you see this precipitous set up in a stock or the market and you have to act quickly. As I have written above - part of it is about watching the herd not predicting things and when doing that, yes, there is a lot of information in a chart signal, volumes, volatility, velocity of the selling. But simply...yes charts are the canary in the mine. We do a daily podcast and a newsletter. Deciding to sell quickly is a progressive process with numerous elements...you can follow us in the newsletter and all is explained day by day. But perhaps the very unique part of what we are doing is treating the money as we would our own (it sort of is...we are invested as well). The one thing an investor (especially one that went through the GFC) wants when handing money to a 'professional' is to be protected come a market collapse but 99% of the profession sees moments like this and does nothing. There is no protection for most investors when they use a big inactive fund manager. We offer protection by being willing and able to cash out, as we would with our own money, its what we would do with our own money sometimes, and we are taking our investors along for the ride.
Marcus Padley
HI Justin - Do I bother replying. You just keep sticking to the idea you can't time the market. See how you go.
David James
Great read and food for thought! You sound like a man riding high on the success. I appreciate these unguarded insights . No doubt the volatility will continue