Whatever the situation, we need a plan. Now that most equity markets have entered a bear market stage (down more than 20% from the high), a new investing plan, based on our current situation is needed. Although the new plan may have to change several times, it still allows me to take control and to take action. Further, a plan provides a reference point for future planning.
Before I outline the Greedy Farmer plan, some other thoughts are worth sharing, I hope. First, I am not a social commentator, but I want to acknowledge the Sars-Cov-2 virus which causes the Covid-19 disease is creating some real human tragedy and hardship. While the focus of this site is investing, the human reality of the disease is not to be minimized.
Secondly, I continue to worry, the economic consequences of the disease and of the actions we all take, many which we must take, are also very serious. People are greatly affected by investment losses, loss of income, loss of employment and even just the worry of possible financial loss. We are in challenging times.
Thirdly, no matter what your current investment portfolio looks like, the fact you have an investment portfolio means you have reason to be positive. None of us should focus on the losses. What the future potential of each and every holding you have, that is what counts. A stock that dropped from $100.00 to $10.00 is more valuable to you now if it has the ability to move from $10.00 to $20.00 than a second stock that only dropped from $20.00 to $10.00 but has only the potential of moving up to $15.00. In other words, my focus is on the present and the future. What assets do you have TODAY and how can they be positioned to create the best TOMORROW?
Fourthly, governments are taking many tremendous actions. A lot of these actions involve spending; actually, the actions first involve the creation and then the spending of vast sums of money. Some people refer to this as “printing money”. I believe those that promote Modern Monetary Theory (MMT) believe this will not do any harm. If more money is needed, to create employment, to allow people to buy necessities, it should be printed. MMT believers do acknowledge a risk of eventual inflation but believe that can be managed.
I don’t have an economics degree, but I feel comfortable arguing the following:
- an activity that creates a needed or desired product or service creates value which can be represented by some quantity of money
- alternatively, simply creating money which is not linked to a valued economic activity – will have a negative unintended or secondary effect, eventually
Money simply printed and provided without any creation of value will reduce the value of all money that already exists or create some sort of bubble. So, if there is $50 Trillion in the world (and I have no idea if that is right) and $5 Trillion is printed to deal with the current crisis, eventually the value of all currency will be reduced by 10%, for example.
This is not to say government actions are not needed. Government action may spread the very harsh impact of the current situation over time and over more people. In other words, your neighbour Bob may not immediately lose his job and all his income thanks to this government action. Everyone in your neighbourhood may find their overall wealth or spending power drops by 10%, or some amount, over the next several years in order to save Bob’s job, however.
Sorry, a fifth point. The world of economics is a human construct. To the extent economists argue there are universal rules of economics, they don’t agree on the rules or how they work.
Consider the following points I have read over the last couple of years:
- stock markets are not over-priced
- economic growth is strong
- long duration government bonds are over-priced and are a bubble that is ready to burst
- gold is for heretics
I have also read the opposite side of each of these arguments. And I have believed the opposite:
- the stock market is expensive
- real corporate profit growth has stalled
- long duration government bonds are a capital gain opportunity
- gold is a buy
Amazingly, some of these arguments rage on even as government bonds rally, stock markets plunge, and gold prices climb. So, knowing who to believe and who to follow is tough. No one will ever be 100% right. The Greedy Farmer portfolios will keep adjusting to follow the strongest arguments. My portfolios won’t go all in with any one prognosticator, however. I will divide my positions and worry my way forward. In this way, I will outperform. That is what makes me successfully Greedy.
Okay, let’s get closer to talking about the investing plan for the remainder of 2020 and beyond. A short recap of where we have just come from and where we are at now will be followed by the action plan.
From what I read; the markets have more downside to go. Markets have dropped from the juiced up high, of the last few years, but still are not cheap. One way to look at the stock markets of the last couple years may be to think of the restaurant scene from Monty Python’s The Meaning of Life.
The stock markets of the last couple of years could be represented by the very large man who was being served in the formal restaurant and after vomiting on the menu, “ordered the lot”. The Covid 19 disease could be represented by the after-dinner mint. As you may remember, the large man did warn, “I couldn’t eat another thing” but he did finally eat the mint and, of course his body exploded in a way possibly comparable to the stock markets of the last month. (I am sure this isn’t a perfect example.) My point simply, it is not just the virus that is creating the value destruction, it is the condition of the stock market and of the economy and financial system at the time Covid 19 began to impact people. The stock market was the large man who stuffed himself beyond capacity.
As we know, the price of stock markets have fallen, over the last few weeks. Some companies are getting cheaper so there will soon be individual securities worth looking at but the market itself, is still not cheap. Further, the Price relative to Earnings (the P/E ratio) is not falling as fast as it may seem. Despite the rapid and violent price fall of past weeks, future earnings are also falling. Since the price of the market is a measurement of share price divided by future earnings (P/E), as the expected earning values falls, the P/E increases. I expect, we have to wait a while longer to reach the market bottom, therefore. I should also note, when you buy the entire market, you need the entire market to be cheap. Fortunately, I will not be buying index funds which are funds that buy “the market” or a component of the market. I don’t have to wait for the market to bottom if I am buying individual stocks. As we all know, it is not possible to pick the bottom anyway. The Greedy Farmer can pick up some well-priced individual companies during the bottoming process knowing, whether early or late, those stocks will grow into or beyond the purchase price, in time.
Another reason I don’t need to panic into buying the market now, I am not out of the market. About a third of my present holdings are stocks. I am therefore partly in the market and if the bottom is already “in”, I am already benefitting. I need to add to my equity position as we move forward if I am to meet my goal to meet or exceed market performance. I can afford to be maybe one-third late, however, since I am already one-third in the game.
There are a variety of indicators to watch to allow us to know when we are nearing the bottom. Some say the bottom, for the overall market, doesn’t arrive until we are a few months from the end of the recession and that could be a while. Let’s remember, right now we are at the start of the recession (depression?), just the start of the layoffs and bankruptcies, the market will take some time to understand what equities are really worth.
No two bear markets are the same. The cause and circumstance of the present bear market is quite different that the 2008-2009 U.S. housing market collapse. Just the same, the chart of the S&P 500 index from that period, is worth looking at. If for no other reason than to see how much the market can rally before falling again (look at the period between March and May of 2008). Additionally, the chart is an example of how long the bottoming process may take. Most instructional, as you can see, some of your early purchases will see price declines before gains unless you are amazingly lucky. Spread out the purchases, harvest the dividends, and know, as long as you buy quality companies which can ride through some tough times, eventually you will be in a positive position.
Chart: Courtesy of Yahoo Finance
- S&P 500 October 8th, 2007 – 1576-point level
- S&P 500 March 2nd, 2009 – 667-point level
- 58% lower, about 17 months after the high
Let’s repeat some thoughts on how the stock market works:
- The stock market is a forward-looking entity so it will get better before the economy gets better.
- The stock market needs visibility of future earnings – it cannot accurately price what it does not understand.
- The stock market will decide what value to place on expected future earnings versus alternative opportunities subject to perceived risks (in other words, is a dollar of earnings worth an $8.00 share price or a $20.00 share price).
The market is really struggling to evaluate those concepts at present. Maybe that is the most important reason it is too early to buy. Again, too early since I am already partially in the market.
You never really know when the time to buy arrives, so the idea will be to spread the purchases out over 12, maybe 18 months. The purchases in the Greedy Farmer portfolios will come from cash on hand and from bond holdings. I have trimmed bonds a small amount but will continue to trim over the next year or more. The stocks I still hold, down as they are, they are mainly solid companies. These companies will bounce back. I did just sell some cash account holdings to harvest some capital losses. For the most part, I will stand pat with the stocks I still own. I will love the dividends that some of those companies pay, I will be reminded of how dangerous investing can be, by looking at the little dribs and drabs of oil and gas junior holdings I have.
I am public with my holdings; it could be argued I should scrub those oil and gas junior companies out of the portfolios. What’s the fun of that?! If a holding is worth $1,000.00 now even after a $10,000.00 collapse, and I believe it may be worth $1500.00 in a couple of years – it should stay in the portfolio (in a cash account it may be worth more as a generator of capital losses but not in a registered account). I am okay with being judged by the overall portfolio performance. The errors have been made and are part of my permanent history, no reason to sweep them under the grain bin and hide them.
Then there is the gold strategy. I had about 10% of holdings held in gold and gold related equities. That sector had taken a beating recently, bouncing back, the last couple of days. Some say gold was sold as investors searched for profitable holdings to sell, to cover margin calls or to create some comfort cash. Others blame the recent rise of the U.S. dollar. It does not really matter. Interest rates are remaining low and money is being printed at a rapid rate everywhere. Even those of us who are NOT gold bugs believe there is future value in gold. Okay, not everyone believes this. I am buying more. I am not buying it all, but I am buying more. Details below.
The buying-back-into-the market – PLAN:
Did I mention I am going to buy a bit more gold?
Yes, the first few purchases will be gold. My target for purchases will end at 15% by the summer. That is the plan now. Hopefully the 15 becomes 30%, eventually, by growing.
In terms of non-gold equities, 2/3 or more of the purchases will be dividend paying stocks for the first while. The dividends will pile up whether the stocks drop further just as they will if the stocks go up in price. This is not to say dividends won’t be cut further, by some companies, if they get into some trouble. I’ll do my best to pick those who won’t cut the dividend, there are no guarantees these days.
There will also be some non-dividend payers simply because there will be companies that are well priced, have low debt, growth opportunities, but don’t pay dividends. I never have cared which way I make my returns; dividends, capital gain, a combination of the two. I just want to make money.
My Greedy Grower portfolio is roughly as follows, at present. And I say, at present, since every hour it changes, and I will be completing a thorough review the first week of April
- 16% cash
- 33% long duration government bonds
- 8% mixed duration bonds
- 2% inflation linked bonds
- 9% gold
- 32% non-gold equities (including oil & gas, utilities, tech., manufacturers, etc.)
So here are how the details of the plan should look:
- Sell 3% bonds each month until all are sold
- March, April: Buy 3% gold miners each month (or possibly some bullion)
- May 2020 – August 2020: build cash at a rate of 2% per month = reach about 24% CASH
- May 2020 – August 2020: buy 1% per month dividend paying stocks
- September 2020 – August 2021: buy 3% per month a mixture of quality dividend and value / growth small cap. stocks
NOTE: Where I say 1%, I mean 1% of the portfolio – so that would be $10,000.00 of a $1 million portfolio.
Also, note: The percentages won’t exactly work out since the various components of the portfolio will shift in value over time.
Another thing: I will buy company positions in layers. Often, I will buy 0.5% at a time. Yes, it increases transaction costs and adds a lot of effort, but often I am more comfortable with this approach. If you are working with just $10,000.00 (total portfolio), you can’t really afford to work that way. $500.00 is probably the absolute minimum – $9.99 trading fee is a big chunk out of $500.00, after all. Larger portfolios have more flexibility, obviously.
That is it! That is the plan! It should take about 18 months to play out. Sure, lots of reading, a bit of luck, and then I’ll pull up my big boy pants and make those purchases. What the virus is doing to people is horrible, the poor fiscal position of many countries, many companies, many people is sad. Let’s make the best of a horrible situation and invest while it is ugly. These opportunities are rare.
The specific purchases that complete the above plan, will be emailed to Greedy Farmer Investing subscribers immediately after I make the trade, and the order will be posted to the site, Member Area.
This plan is NOT set in stone. The most successful people I know second guess some decisions, flip-flop on occasion, and change their minds when the information available changes. Yes, you can overdo such second guessing but there is also value in the behaviour. Check your ego at the banking portal! The main thing is to have a plan. Having a plan and taking measured action is the only way to make things happen. Taking plan-based action also does build your confidence. And what is more important than that right now!
One final thought. Do yourself a favour and be sure to total your complete holdings. Write that number down once a month (or week, or whatever). That allows you to give yourself credit for the dividend and interest earnings as well as the capital gain or loss. It also may focus you on the portfolio instead of that specific horrible stock(s) that is down 80%. I have them too. But if you are down 5.9% year to date (Greedy Grower), like the Greedy Farmer and the S&P 500 is down 23.3%, as it is today, you are KING! Have fun with that. Everything is relative, after all!
You and I may not see any government bailout, we have to do the right things to ensure we get through this thing whole. This is a once in a lifetime environment, fasten your seatbelt.
Good Investing and Stay Greedy!
[P.S. I wrote most of this on the 19th, since that time I did buy 2.6% more gold, sold some Canadian government bonds, and am now looking at some U.S. municipal bonds. The detail will be provided to subscribers – things change daily, we need to remain flexible, in these fast-moving times.]
 “Monty Python’s The Meaning of Life” United International Pictures. Directed by Terry Jones. 26 April 1983.