So far the year has not been generous to US investors. The market is down 9-13% depending on what index you are looking at. The portfolio is up around 1% YTD thanks to a large allocation to Berkshire, Alibaba, and a few other securities. JP Morgan with the rest of the financials had a good year start till earnings came out. I was disappointed with the banks’ earnings and hefty compensation packages paid to bankers.
I believe banks are better positioned in this high valuation environment, also considering potential upcoming FED rate hikes. The question is will the FED rate hike continue to be 3 times this year? current sell-off can spook the regulators causing a reflexive reaction by them to the market and may either reduce rate hikes to 2 or wait for a bit longer to raise 3 times. FOMC minutes will be crucial to see where governors stand next week. I am sure they dont like the picture around the stock market these days.
Market sell-off gives an opportunity to reflect on the securities you hold. I had to revise my holdings carefully and see what needs to be changed. Chinese stocks I own I believe are at a good price point. I am close to the average cost I purchased at, I have no inclination to sell them. The Chinese economy will keep prospering in the long term better than the US economy, Chinese companies including Tencent, Alibaba, jd.com will prosper along with the country. So far, sell-off in the US market has not impacted Chinese equities. Chinese central bank cut the rates by 10bps, albeit not a large cut, it sent the signal to the market that they might do things differently over there. I think Chinese exposure also allows me to diversify from US equities. Companies I have invested I believe have strong balance sheets with durable, long-lasting business models and large sell-off last year gave me an opportunity to buy them at a lower price.
There is one security that bugs me more than anything else and that is Twitter. Few months ago, I went against my own thought process and bought Twitter. I had told myself to ignore the company in the midst of certain account suspensions of political, public figures considering it would anger certain investors to dump the shares. But after having a closer look, I thought despite Twitter has not found a way to monetize its platform as well as Facebook, there is potential it might in the upcoming future. Looks like the market disagreed with me and the price has been downhill from there. Certain improvements like twitter blues, spaces, now NFT profile pics (stupid IMO) are a small improvement, but Twitter lacks proper product and marketing management teams. I will probably wait for the next earnings call that is coming and will review the results. The current sell-off of the stock has pushed the price below the IPO price level. When the market rebounds (it will one day), and the impact of market volatility is removed from stock price, I will reevaluate my thesis around Twitter. The earnings call will be a crucial gateway to see what Twitter has done in the past 3 months and how users have interacted with the company. I don’t bond emotional connections with securities I invest in. It is a recipe for a disaster. If last quarter was abysmal and the future for Twitter seems low growth, and they can not figure out how to monetize their platform, I might have to sell the security at a loss. Reddit I believe is doing a far better job at monetizing than Twitter these days. Reddit IPO and S-1 filing will be worth heeding.
Another buy I have is Jefferies ($JEF), a mid-cap investment bank. I was disappointed with their results on two fronts in a recent call. Lower share buybacks and higher packages to bankers (ofc). As a shareholder, you don’t like fat bonuses paid. Keeping costs down is crucial without losing your bankers. I think that is how Wall Street always justifies its higher compensation packages. However, I think Jef is one of the few banks on wall street that is valued attractively. It’s a mid-cap company with the potential for growth and under current management, I have a higher conviction for now that they will keep expanding, add more headcount, and take more clients to do business. I dont expect stellar capital returns from it, but attractive valuation, the combination of average capital return for the foreseeable future (driven by growth, share buybacks, trimming merchant banking), dividend yield in the environment of a bubble-like stock market is a good place to be in and wait.
The current market sell-off is also an opportunity to buy securities you wanted a few weeks ago but couldn’t due to price. The issue is you won’t be able to time the bottom. Either you will get in early and lose from here for a short period of time or you time the bottom perfectly. The former is very much likely from a probabilistic point of view. Waiting and missing the bottom though is not advised if you believe a company you would like to buy is attractively valued. Investors who miss the rebounds usually underperform SP500. Thus, if you have found a security that you would like to own, it makes sense to purchase it at times like these.
Another important issue I think to talk about is what you do if you sell your equities sitting on cash when inflation is above 5%? you dont have many options whether you are a large institutional investor or retail. When hikes are expected, you won’t make money holding bonds especially real yields are negative. Commodities have not been the playground for large money play except in gold or oil to a certain degree, and inflation is basically taxing your cash. You end up with equities again. Why not own security that has a great business model, generated free cash flow, and is here to stay? The issue is whether you would like to hold P/S 30 stock with no positive earnings on-site at times like these. Sector rotation has been going for a while since the second half of the last year, now, market participants are de-risking for the past week. I think the biggest takeaway should be going back to your holdings and analyzing each one of them. Some of the tech stocks that have been hammered badly will rebound strongly when the dust settles, others might take years or not all to recover like Peloton. Reflecting on your holding is crucial at this point. You can double/triple down, hold or sell and get out.