Significantly cashing up the portfolios

Marcus Padley

We are significantly cashing up in the Marcus Today portfolios today. We are doing it for a number of reasons. Managing money is about stock selection and timing. But just sometimes you have to look up from the stocks and respect what the "Wood" is doing not the trees. This is one of those times.

Corrections start fast

This looks like the beginning of a US profit take, it's overdue and we will not escape. We have been “running with the market” despite a lot of stocks on high PE’s and looking overvalued. I have been happy to run with it while the market mood was "comfortable". As of now, it has become uncomfortable. We have been watching the recent short-term falls and wondering whether to do anything about it and so far haven’t. An 830 point fall on Wall Street says one thing, do something.

The need to be decisive

One of the major failings of individual investors is an inability to sell, but if you wait for the fear to become mainstream and you will be selling far too late. So we are being decisive on behalf of members. Selling is over dramatised, you can always, with commission rates where they are these days, buy everything back the next day if that’s what the market tells you. So we are putting ourselves in position. We are taking an option on the market falling, and the cost is the brokerage which is minimal in our structure. It's almost a free option.

We can always buy back in

We reserve the right to be buying everything back in a day or two or maybe a month, who knows, but we are not going to sit here fully invested with our thumbs up our @#$% making excuses for why the market sell-off doesn’t matter. I’d prefer to be waking up happy that the market is falling and calculating when to buy back in.

Because we can

One of the big attractions of investing in SMAs (Separately Managed Accounts) is that we can go to 100% cash if we want to. In other words, we can protect investors in a way large managed funds simply can’t. Our Members expect us to do it, to be decisive at difficult times, on their behalf, so we are reacting to the overnight market sell-off rather than prevaricating about it. With only $31 million invested in one fund and $5 million in the Income fund, we can be nimble.

We need cash to take advantage of the market fall

We need to raise cash so we have some ammunition to buy back in - I am always busting with great ideas, quality stocks I want to buy. A great opportunity may be on the way to buy them on lows not highs. If we don't sell we can't take advantage of it.

Fear breeds fear

Kerr Neilson (the retired multi-billionaire fund manager of Platinum Asset Management) said last year: “We as fund managers are institutionally bound to play the game until the last second” - we've been playing along despite the high PEs and the exponential technology stocks. A slap in the face like this can change the mood and will turn the herd. No more benefit of the doubt. All the glass half full commentary will turn into an "it was obvious" in hindsight analysis that the market was overbought.

No big panic

It is just the herd, that's all. You will see a lot of talking heads floundering around in the next 24 hours, knowingly explaining exactly why the market has fallen over (interest rates going up in the US, trade war concerns), but they are ignoring the most important factor, the herd. Sometimes the herd, when it is moving swiftly higher as it has been, can change direction even more swiftly. You don’t need an excuse, and in a world where over 50% of our trades are done by computers, and there are trillions of dollars in exchange-traded funds which are robotic, we have never really experienced how savage this new electronic herd can be. All the more reason to stand back while nobody knows.

Australia will do better than the US in a correction

25% of the market (the banks) are already in a sentiment hole with no profits to take (as are insurance stocks) and because we don't have a developed technology sector. The FAANG stocks on the other hand account for 25% of the S&P 500.

THE COLLINS CLASS RULE

Marcus Today Members will all be aware of the "Collins Class Rule". This is the story about what one of the Marcus Today Members who used to work in a Collins Class submarine on weapons systems (computer whizz). When they surfaced, he would download stock-market data. When they submerged, he would spend many hours of idle time back testing numbers looking for patterns in share price movements to see if anything systematically worked.

He found some 'edges' (identifying and buying into breakouts with short-term trades became his thing) but one of the things he discovered was that, despite the reliability of his system, he still got nailed in market corrections and that whatever your system for stocks you always needed a sweeping market filter that would cover you for large quick market movements - something that forces you to look up from your stocks (the trees) to the market (the wood) and in so doing protect you when the whole wood moved suddenly.

After a lot of backtesting on why he sometimes got it all wrong, on why the systems broke down, on why he got caught out by ‘the market’, he identified that corrections start fast, and you had to have an unemotional mechanical strategy that pulled you out early on the big market falls.

He developed a filter that overrode all the rest of his systems which said that if the US market ever falls 3% in a day you sell half of everything and, if it does it again, you sell the rest.

The Dow Jones fell 3.15% last night. The NASDAQ’s fell 4.44%, and the S&P 500 fell 3.28%.

Sometimes “the market” takes over from the individual stocks.

WHERE TO AFTER CASHING UP

Once you are in cash (well, mostly cash) the storm disappears, you can be unemotional and objective, and the only decision is when to buy - it is a glorious alternative to sitting there taking losses in denial of the market sell-off - which is what 80% of the industry will do today.

Trend changes start fast and then trend in the same direction. I am expecting this correction to continue, not miraculously turn on a sixpence. But I am open-minded enough to believe that it could all end tomorrow and we will take the appropriate decisions if it does.

We will wake up every morning and make decisions based on the facts. Investment is not about making unmakeable predictions. That is the stuff of publicity seeking financial commentators who don't know they don't know, or do, but throw their predictions out anyway in an attempt to attract attention. Our job now is simply to time buying back into the market, and we do that by assessing what has happened not by guessing what will happen.

There is no rush to buy. The market goes up slow and down fast. The bubble has burst, now it will take three times as long to build confidence as it took to lose it. You will have time. All we have so far is the arrival of a storm....this is not the time to push the boat out. Wait for the Sun to come out; you could still get sunk.

CONCLUSION

  • Cashing up significantly.
  • Being open-minded about whether this is the start of a correction or a one-day sell-off.
  • Waking up every day deciding whether to buy back in.
  • Making a list of stocks we will buy with the cash we have raised. Truth is it will be the same list of stocks that we are selling today (with maybe one or two changes).

Enjoyed that?

Marcus Padley is the author of the Marcus Today stock market newsletter. To sign up for a 14-day free trial please click here.


Comments

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Nikolaos Armenis

Exactly what I've been doing - I now have plenty of cash to buy things I want down the track :)

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Graeme Holbeach

Don’t often find much to disagree with Marcus’s writing, but have to comment on the “We can always buy back in” assertion. While mentioning brokerage is minimal, he completely ignores that capital gains tax may not be. I have a large investment in a LIC in my wife’s name that would be nice to lighten in the current market, but 14% of the proceeds (Note: Proceeds not profit and after the 50% discount) goes straight to the ATO. Is selling still the right decision when there is an alternative of selling them in a few years when her tax rate will be zero?

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Luke Heilbuth

Hi Marcus, love your commentary and insights. But two points I'd query here. As touched on in the comment above, there is a tax cost associated with selling a portfolio and rebuying it again once the macro fog clears. The investor potentially loses the benefit of the 50 percent capital gains discount, and may also attract unwanted ATO attention for trading in and out the same stocks. Second, you are assuming a highly rational approach to repurchase following the initial sale decision. Most retail investors are incapable of overcoming their behavioural biases, and will be too afraid to re-purchase their portfolio at the ideal time; waiting instead until stocks have significantly appreciated, thereby missing the best initial gains as market sentiment turns.

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Barun Dutta

excellent article Marcus. I wish to have read it on 3 or 4th Oct to make benefits than reading when market has already crashed. Time is always important for making decisions. Magma Copper purchase and sell was done in wrong time, So was Alcan purchase by Rio, as well as buying and selling of Channel 9 by Alan Bond. I am sure your direct clients have received this valuable advise of yours in right time and for readers like me only can lick their wounds. Good report regardless and as you said - Not to panic.

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Simon Rutherfurd

Yes, an interesting article thank you Marcus. But re: "if the US market ever falls 3% in a day you sell half of everything and, if it does it again, you sell the rest." I do note the S&P 500 fell six days in a row from 18th August 2015 to 25th August 2015 including two consecutive falls over 3% on 21 August and 24 August. After an 11% decline to a bottom of 1868 the market finally rallied 3.9% on the 26th August. If you had sold everything you would have missed the 48% gain to today's level of 2767. Other readers' comments re CGT are clearly valid, but the hardest part is timing entries back into the market as news commentary will naturally enough be increasingly negative in tone.

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Richard Rijs

What happened to "time in the market, not timing the market" is what investing is about?

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Peter Hills

This is an interesting method being proposed here. I'd call it "sell high, buy even higher".

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Bruce Aulabaugh

US markets in general are very richly valued. High valuations are precursors of low 10-12 year forward returns (John Hussman et al). High valuations can persist for long periods but when investor sentiment turns then 'watch out below, as selling becomes indiscriminate' just when bids dry up. Many sentiment indicators (e.g. market highs vs lows) have turned negative recently against a backdrop of US reserve bank tightening, trade tensions, over stimulatory fiscal and tax policy, and sky high debt (household, corp, govt). Recipe for disaster, so deciding to 'cash up' in some form is prudent.

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Rob McGovern

the world has changed & I'd have thought our thinking should too. I am open to the concept of timing the market rather than time in the market. How is it not a heard mentality to say you've got no chance of timing the market? do we have a bigger chance of 20% north or 20% south from now? I have never heard a solid arguement for not timing the market. The biggest winners of the last decade are those who had cash pre GFC. If we've had the longest or second longers bull market in history, then surely we're closer to a south movement than further norths. I'm reconsidering, sustaining losers by shorting in the short term.

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David Chia

Thank your lucky stars Mr P. that your crystal ball broke so you never got suckered into the business of divining the future. Fool’s game for sure and served only the diviner really. At day’s end, I am reminded often that you need someone else holding an opposing view to make the game work. So be done with the preaching already I say. As for the gentleman with the CGT dilemma, I am reminded of a client of mine from years back when CSL had it first decent pullback. He too encountered an identical dilemma. The market did however resolve the matter as he was, before too long, minus a CGT problem but could boast about a zero tax rate. Can’t have it all. Enjoy your no b.s. approach. All the best. David

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Graeme Holbeach

David, if you’ve been round long enough you’ve got mates who have done something that demonstrates just about anything. At one extreme there is your example. At the other extreme there is someone who sold, paid the tax, put the remains into something that tanked and then watched the sold stock go through the roof. Both are of limited use in addressing the real problem of deciding whether what you’re selling is likely to go down by more than the initial tax amount by the time one’s tax rate is zero and whether a replacement investment will make up the tax paid in the same period.

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David Chia

Totally agree Mr Holbeach, that a long sit on the beach will reveal all manners of creatures as we watch the tides. I have no expertise whatsoever to offer any pointers that may go towards resolving the dilemma you confront. Surely it can only be a matter of conjecture, given the variable of the market is unknowable in terms of precise quantum, in any given time period. Not a view held by all I know. Though it is not too difficult to build a model to engage the longer term ebb and flow of markets (and CSL for that matter), pay them taxes should they occur upon realisation and re-enter your position. The nominal and relative prices you sell at or buy back in are not as relevant as many would think. It really is a false choice between time in the market versus timing the market. Why use only one hand when we all come with a pair, I say. All the best in your endeavours. Kindly. David

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