Some fund managers celebrate a 1% outperformance of their benchmark over a year. The Marcus Today Growth SMA has outperformed its very demanding ASX 300 Accumulation benchmark by 23% in a month and is down just 6.1% from the top before the bounce this morning. Most of that performance has come courtesy of a 70% plus cash holding on the way down.
We have lucked out - in fact we have lucked out and lucked in - our timing has been impeccable. But lets not pretend - its been a lot of guesswork because lets admit it, no-one really knows.
Below we talk about being on the Spectrum - from Super Bear to Super Bull - and the need, in this uncertainty, to have no view at all. We also reiterate today that we have not taken a view that this is the bottom, we know we could be wrong, and in light of that we are fully prepared to go to 100% cash again if we see the need. We'll just keep waking up every morning and making decisions.
We'll take it - we were due a bit of luck after prematurely cashing out last year and getting it (mildly) wrong, and after being scarred by the 15% correction in October 2018 (our fund fell 23%). We learned some hard lessons through those big call experiences, but it's paying off now and I would like to think there was a little bit of skill born of experience involved in our recent timing.
As Marcus Today Members found out earlier this week, on Tuesday (24/3/2020) we reduced the cash asset allocation from 70% to 40% and on Wednesday (25/3/2020) we went (almost) “All in”. 93% invested is pretty much all in.
Net result - Cash is down from 70% to 7%.
Don’t worry, I am as smart as you, I know this could be the hokey pokey, I understand that this could be a dead cat spike, a false dawn, I know there is a very good chance that the bottoming we are seeing this week could be reversed the next and I understand that there is a road to be travelled with COVID-19 that we have only just stepped upon.
Every bear market is punctuated by large spikes, the biggest rallies occur in a bear market not a bull market and here's another. The Dow had its biggest ever one day points gain this week and the biggest percentage rally since 1933.
But maybe this is the bottom.
It is very important at this time that you watch the herd not become part of it. I keep having to pull up my Team for running with the pack (buying toilet paper because everyone else is…Chris!). You will not make any great decisions if your head is in the same space as all the other headless chickens. Stand aside. Watch, listen. Nod. This is a time for Spock like cold assessment, not emotion. Be Spock, not some bogan buying bog paper, not some short term trader bragging about their one day gains in Afterpay.
As you can see from the comments on the bottom of every COVID-19 article, in the middle of these moments of extreme uncertainty there is a spectrum and everyone is on it. It runs from Super Bear (we're all going to die) to Super Bull. The people at both extremes can't help but express their strong views. But we believe that having a view (about COVID-19) is the biggest mistake you can make at the moment. You cannot afford to have one. It requires faith based on shifting data and faith is a failure in the stock market. We try to avoid being on the specturm at all, having no view. Instead we are watching everyone else on the spectrum and remaining cold, like Spock, unemotionally watching the volatility in sentiment and making decisions when the collective sentiment shifts. Investors should not be taking a view on how bad the COVID-19 crisis is going to be, because you don't know. Instead we try to observe and react to the market.
Listen to any financial market commentator. You will hear two types. Those that are talking about COVID-19 and how bad it is going to be which requires them to guess (they are not medical experts), and those that are talking about market sentiment. You can ignore those with a view about COVID-19. They don't know they don't know. Fund managers need to stick to what they know - watching the market not passing medical opinion.
There is no doubt that we are seeing the first significant technical bottoming in the markets (see charts below) and that alone would have been enough for us to at least reduce our very aggressive cash position, but we have gone further, we have gone fully invested.
Let’s be clear - We are not after clicks, we are not grandstanding, we are guessing as every other fund manager buying in the last month is guessing. Every decision in the stock market has to made with an element of the unknown but if you are perpetually timid you doom yourself to underperformance. Chickens don’t make money and as I wrote on Tuesday, fund managers are not demi-Gods, we like you, "don’t know", but we are charged with the responsibility of making decisions on experience that some investors can't make, or don't make, but we have to make. Timing the bottom is not possible using science or fundamentals (earnings numbers are in flux anyway), it is going to take 'feel'. We have that feeling and have done something about it.
But we are not doing it on a whim, we have our reasons.
- We know we don't know, but we have an insurance policy. We are a small fund. If this is a false dawn we can easily reverse it.
- There is a very good chance the market has over-reacted to COVID-19. The market fell 38% from top to bottom and some of the banks 56%, more than they fell in the GFC, in just a month. Investors have decided this chapter will destroy 40% of the stock
market's value. They do not have evidence of that yet. It may prove to
be, and we can sell again if it continues to unfold, but if not these prices will prove to be a very rare opportunity we cannot miss. This is a table (26/3/2020) showing market performances since the top:
- The market is pricing in an economic catastrophe based on months of business lockdowns. The CEO of Starbucks reports this week that they are reopening stores in China and are “on the uptick”. That’s 9 weeks from start to finish. Wuhan is out of lockdown. Hubei has eased travel restrictions. Railways are now offering 45% discounts to actively encourage the Chinese to travel again (!)
- The number of daily deaths in Italy shows signs of slowing. The markets will be led by the Italian experience. One broker writes "Using mathematical modelling techniques to try and track the progress of the virus in different countries reveals Italy is flattening the curve substantially and after 23 days we will see active cases reflect previous infection data".
- There is a good article on Livewire from Christopher Joye talking about “Peak Virus”. It’s a statistical look at the spread of the virus - it says "Assuming that the US and Australia are only 50% as effective at
containment as South Korea and China, infection numbers should start
rolling over in early to mid April". We're already in late March.
- There is noise about the FDA approving anti-viral drugs that alleviate symptoms and reduce mortality rates which would significantly relax COVID-19 paranoia.
- The central bank action (overreaction) has made sure that when the "All Clear" sounds the global economy is going to be on "steroid" settings and the stock market will price that in.
- The US has fired a two trillion dollar 'bazooka' - it is potentially overkill.
- The fear will peak. At the moment the UK and Australia are at ‘peak fear’. In Italy they are past fear into the serious stage. When Loo paper, pasta, flour, rice, sanitiser and soap re-appear on the shelves, our ‘fear’ is going to turn from headless paranoia, to acceptance, serious address, then boredom and on to impatience. Then be forgotten. One headline says "How much of the farm do we have to burn to contain this thing". We are going to be throwing away COVID-19 test kits in a year’s time. Look up from the frenzy.
- The biggest driver in the stock market at the moment is sentiment not earnings. The sentiment swings are fast and extreme. There is a good chance we are coming off a negative sentiment extreme which means we cannot wait for fundamentals to prove us right, this sentiment improvement could be a step change move and it could be over in two minutes. We are fearful of missing out on a very sharp market rally.
Everyone ready to buy - Almost all fund managers know this is a once in a decade buying opportunity the only question they differ on is "when". With a consensus that at some point everyone will want to buy, by the time that moment becomes obvious it will be far too late. We have to move early.
- The stock market will anticipate an improvement in the virus experience well in advance of the human experience. The markets will bottom whilst we are at home with COVID-19. We have to buy before the all clear.
- We are supposed to buy when others are fearful. The VIX Volatility index has just peaked – see charts below.
- The Italian market, some European markets and some of our large stocks are turning, some technical indicators are even throwing out buy signals. See charts below.
- Our Members, and the investors in our fund, expect us to do things they can’t or won't do, like making the decision to buy when all around us are losing their heads. And sell again if we are wrong.
This is not a big call, its not a declaration that "this is the bottom". We are not trying to get clicks. We know this could be wrong, of course it could. This is simply the transparent admission to you that earlier this week we saw the risk of a short sharp large rally in the market and we didn't want to miss it.
Finally - We are utterly prepared to go to 100% cash again tomorrow if we need to. The best you can do in this uncertainty is to wake up every morning and make decisions. There is no play book for this historic moment in the market. .
SOME CHARTS (From 24/3/2020)
The Italians have led the Western World COVID-19 experience and their market has had its first significant bounce. There is an RSI and a MACD buy signal on this daily chart.
The German market has also seen MACD and RSI buy signals. As an export market weighted to motor manufacturers that have been disrupted by a lack of components because of COVID-19 they are also a barometer of COVID-19 stock market sentiment.
Boeing is proving to be the bellwether stock of the financial crisis fears and that too has bottomed in the very short term.
The VIX volatility index has topped out from GFC levels. Another signal that sentiment has bottomed. If you are supposed to buy when others are fearful then this is telling you that that moment has come, and is going.
The Australian dollar is a barometer of global economic growth prospects – it falls when global growth prospects weaken and it has fallen 17.6% in just eight days. It is now bottoming.
The 8% bounce in the US market on Monday was an early technical signal. MACD suggested the momentum of the fall had peaked (Moving Average Convergence Divergence – the blue histogram – a buy signal is when it crosses from below to above zero).
Our market popped 4.2% with MACD bottoming and an RSI buy signal close.
We spent Tuesday getting back to market weight in some of the big index stocks and on Wednesday added other large quality stocks that are not in the front line come COVID-19 fall out. Buying cruise line stocks (some were up 40% in a day in the US) is for braver managers than us. There are plenty of quality growth stocks that are not directly at risk from COVID-19. Healthcare is a focus.
This might help. this is a list of the TOP 50 and NEXT 50 stocks and their performance from the high just over a month ago and their performance from the high to the close on Tuesday 24/3/2020.
One of the lowest risk trades in the GFC was buying Hybrids that got smashed on concerns that the major banks would go out of business. In the end the banks didn’t miss a payment and the hybrids came back from 25-60c in the dollar to par. When our financial crisis fears are contained they will do so again. Here is a table showing the performance of the major hybrids movers over various time periods. Over a month most are down over 20% - 30%. In hindsight, this could once again prove to be the lowest risk trade in the whole market (don’t shoot me if the major banks go bust!).
SECTORS IN THIS SELL OFF as of 24/3/2020
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Brave call Marcus: "Chickens don’t make money..." Reminds me of the Monty Python Black Knight sketch: "King Arthur: Look, you stupid bastard, you've got no arms left! Black Knight: Yes I have. King Arthur: Look! Black Knight: Just a flesh wound. [Continues to kick and taunt Arthur] King Arthur: Stop that! Black Knight: Chicken! Chicken!"
Mr Stripes - As a ex-pat Pom I inevitably do have Monty Python in my DNA
Good Luck with this call Marcus and as always, thank you for your honest views. Much Appreciated.
So how and when will you know you are wrong? You mention if you are wrong you would sell, but then you would be selling when the market is 40 to 60% from peak. Wouldn't that be a good time to buy, so how could you ever possibly sell?
Good luck. I have two problems with the call: 1] Case numbers and deaths in the US are set to explode 2] The Third World has no ability to stop or even slow the virus which will run its course, that means, possibly, millions will die If that is the environment, we have yet to see the bottom. This is NOT the GFC and GFC tactics will not work
Big calls are generally more about self promotion rather than sound decision making, in my view.
Great info. One of the best you've wrote. All in with patience will pay handsome in 2 years. Thank you, Marcus.
Hi Jonathan - There is no song sheet we are singing to - we change our minds on a daily basis - it is the best you can do - wake up every morning and make decisions. I don't know when or if we will ever sell. One day it will come to us. I know financial product sellers and professional commentators tell you that you have to have a trading plan and pre-think every move - you can't. If you want to know when we sell if we ever do and why then please subscribe to Marcus Today - we publish our mindset and decisions daily.
I'd be very surprised if the Aussie and USA markets don't fall by 50%. Even if the disastrous economic effects are only temporary. The GFC was only temporary too, but the falls still happened. Lot of unemployment now.
I'm seriously surprised by the call. It looks like a FOMO call. You mention that you consider it a possibility that the banks may go bust (99% certainty they will be bailed out if this happened). That is how serious this is. It has come so fast that people haven't even had the chance to grasp what is happening. Shutting an economy down is easier than bringing it back to life. The way it looks now you'd be lucky to find a restaurant to have a meal at in 6 months. That is just because they won't exist anymore. There is no play in the book for what will happen in real life in the next 6-24 months regardless of how much government intervention there is. A lot of people think that this virus will pass quickly. The reality is that it is unlike any before. It is suspected of being able to stay active on surfaces for 17 days or more. Getting rid of this will not be easy. There is hope in the markets that stimulus will save us at this point. Companies are going to go under because of this. This has not even started yet. I think this is a very early call. Even health related private businesses are entering survival mode. This is not even something that had likely not even happened in the GFC. Capital preservation should be all important at this time. One can come back from 30% loss a lot easier than a 70% loss. Missing the bounce here does not matter as markets will not snap back immediately to their previous highs. There will be more opportunities later when the risk is lower.
Hi Marcus, It's hard remain patient in this market and not be overrun with emotions. "This chickens missing a few feathers" :) However I'm going to continue buying more of my best picks and will gradually add to these postions over the coming months. I prefer to be consistent with my approch and dollar cost average back in, especially now that stocks are so cheap. Maybe they'll get cheaper maybe they wont? but I know that I've given it my best shot to capture the bottom.
More right than wrong Marcus.
Peak covid and fear - probably a good time to go mostly in before peak FOMO kicks in - your history of making calls on the market prove you know your stuff.. thanks for the update Marcus
Monty Python DNA might come in handy Marcus. Economic fall-out barely visible earnings-wise atm, PEs revised to 10x a possibility. Though the Black Knight would probably regard further 20% drop from Monday's lows as a mere 'flesh wound'.
Go Marcus. I like your approach "...wake up every morning and make decisions". Kicking goals each day since.
I like the thinking that Marcus has shared here. I think this crash is a lot like 1987, only in about half the time. Everything does move faster today, given the technologies we now have. Like 1987, we may have seen a panic leading to stock prices being pushed down excessively, only to settle somewhat higher and to enter a slow recovery. I too could be way wrong, but that's how I'm reading it for now and have been buying, but not hastily.
Thanks Marcus great post. Judging by the comments here we re definitely at or very near the bottom.
An all in call but with plenty of caveats. My concern is an explosion in US cases and deaths but with no offsetting trillion dollar announcements in coming weeks. FOMO is high of course, but that is a risk I'm willing to take at this stage.
BTW, Wuhan is still in lockdown, FYI Marcus. From January 23 to April 8.
Like millions of other Australians, I really hope you are are correct Marcus
no chickens only lay eggs! been eating a lot of thoes lately
Plenty of caveats Justin - there are many unpredictable twists and turns left and I don't rule out an article that says "All out"!
Can you really say that you are making a fully unemotional decision to go back 'all in'? I think if you considered your decision objectively you would identify an urgency and drive that has its roots in emotion. We have always been taught to make decisions with the head and not with the heart, as investors.
Thanks Marcus, I appreciate the balance in your commentary and that it is not the typical backwards facing fence-sitting which has become commonplace. For sure there is going to be massive hardship, but when the crisis ends as it inevitably will, business will restart, restaurants will re-open and travel will resume.
Don't start on Monty Python .We could be here all day mate !
Reply to ROBERT G 26th March. I totally agree
Most commentators discuss saving the economy by way of increased bank lending liquidity and government fiscal packages to support the community which raises the question of how we eventually pay for these costs in the future, ie increased taxes, reduced welfare payments etc. If the community loses confidence in these methods, this will quickly lead to depression and runaway inflation (think 1920s Germany), so as financial commentators, please stress the most important issue of preserving community confidence in these dreadful times more than anything else. bryan mcmahon