Portfolio Changes & Covid-19 Update

“Widespread fear is your friend as an investor because it serves up bargain purchases"

- Warren Buffett

The Portfolio

The portfolio is up over +7.0% this year.

Our benchmark index, the S&P 500 is down around -6.5% YTD.

If you're interested in the stock market, are looking for diversification or growth please feel free to connect me. I'm always available to talk, maybe provide some new ideas or to present to your group. clay@claybaker.com

What I'm doing today

I sold our 6 shares of SAP and 50 shares of Fox Factory Holdings to raise cash. The SAP sale was more around limited future upside and exposure to Europe, whereas the Fox Factory sale was a trim because we had a large position. My conviction in Fox Factory hasn't changed and we still hold 100 shares of FOXF.

​​Today I bought more shares of Generac (GNRC). This was a limit order that triggered today when the stock made a short lived decline. For many of the stocks in the portfolio I have alerts at or below my Buy Around price targets. I didn't expect Generac to decline all the way to $104, but I'm happy to have acquired a few more shares. If we had a lot more cash I would have doubled our position at that price.

Bought 10 GNRC @ $104.00

What's Happening?

Corona virus (COVID-19) is still front of brain for all investors. I will not pretend to offer an authoritative medical perspective. With the exception of those most directly involved in finding solutions to this virus; I wish everyone else would quiet down too.

Our focus here is on personal investing, so what we discuss here should solely reflect on our own expertise with respect to investing.

  • While it is hard to predict the economic impact from the coronavirus (COVID-19) in the first quarter given little yet reported and many unknowns, most economists are anticipating a rebound later this year.

  • Two of the best performing stock markets in the world so far this year are China and Italy, where COVID-19 outbreaks have been focused—reminding us that headlines don’t often make for good investment advice.

  • Rather than trying to call the bottom, a more effective way to think about investing right now is to focus more on the DURATION rather than the DECLINE. Markets may have further to fall, but they may not stay down for the rest of the year barring a severe pandemic.

The chart below from Charles Schwab provides insight into market modeling under various scenarios. Under the worst case scenario this model projects that global GDP could decline as much as -4.7%, which is 0.4% greater that what occurred during the global financial crisis. Assuming a mild pandemic, global GDP should decline just -0.7%. Since we have managed our way through a version of the worst case scenario, the take-away here should be that all scenarios can be managed. The difference today is that the systemic problems that we had in 2008-2009 do not exist today.

So what if anything can governments and central banks do to soften the blow? While some economists believe that central banks have no role in pandemic response and others believe its imperative that they respond; we can only observe what is being done and the effects those actions may have on your investing. Personally I don't want to see the US Fed lower interest rates. The primary effects of lowering rates is to decrease income to savers and to push investors further out on 'the risk-curve'. When interest rates go down, stocks typically go up. That buying pushes stock prices up by expanding the price/earnings multiple. I prefer to see stock prices rise on earnings and revenue improvements.

  • Hong Kong announced stimulus equivalent to 4% of GDP in the form of giving 10,000 Hong Kong dollars to all residents 18 or older.

  • The German finance minister announced plans to suspend the debt brake provision in the German constitution to allow higher deficit spending.

  • China has unveiled a host of measures from cutting rates to boosting infrastructure financing and support for small and medium-sized businesses.

  • Taiwan has approved a $2 billion stimulus package that includes tax cuts for travel related businesses.

  • The market is expecting the world’s major central banks to cut interest rates, including the Federal Reserve as soon as the March meeting.

One way to look at what the stock market is anticipating is to compare it to the spread of COVID-19. The chart below indicates that based solely on the trends in new case growth and stock market moves, the stock market may be pricing in the risk of a surge in daily new cases triple that of the late January peak. In short, the market is looking forward with a more negative view; which may or may not be accurate. All predictions in the stock market are known to be something less than precise. I like to keep this old saying front of brain when making predictions.

"The stock market has predicted 10 of the last 5 recessions"

Rather than trying to call the bottom, a more effective way to think about investing right now is to focus more on the duration rather than the depth of the decline. Markets may have further to fall, but they may not stay down for the rest of the year barring a severe pandemic. The last major bear market began in October 2007 and didn’t bottom for one and a half years as major imbalances had to be corrected. Today, the global economy faces fewer such imbalances. A short duration drop by nearly any amount is easier on long-term investors than one that lasts for years.

What Should You Do?

Over the past 12 months, markets have rallied and declined, which may have knocked your portfolio allocations off course. Rebalancing back to long-term targets may be appropriate. Now would be an optimal time to revisit your plan if it’s been a while since the last review.

You have a plan...right?

Regardless of where you personally fall down on the outcome of Covid-19, to take a strong investing position, one way or another, it takes strong conviction in answers to key questions.

Questions we should be looking to answer include:

  • What is the impact on China’s economy? The first credible data point won’t be available until we get the February purchasing managers’ index report on Feb. 29. But that is just one survey, it won’t be until March 16 that we get the industrial output, fixed asset investment and retail sales data to give us first take on the COVID-19 impact.

  • How quickly is the supply shock easing as production returns in China? Chinese officials have announced that at least 50% of major industrial firms are back to work and cited even higher percentages in key inputs like metals (80%). There is some evidence such as rising air pollution levels, and shipping traffic to suggest this may be the case. But the pace that China restores the remaining operations is critical to assessing the global supply chain impact. Additionally, while supply chain disruptions in China may be easing, disruptions in supply in countries outside of China could form.

  • What will be the response to outbreaks in other countries? China had an authoritative response to containing the spread of the virus, other countries may be less willing or able to quarantine large regions or shutdown businesses. World Bank research shows that 60% of the economic impact comes from cutbacks in travel and entertainment with much of the rest tied to other efforts to avoid infection. Rather than being made by one party as in China, those decisions may be made by thousands of businesses and millions of households around the world which are hard to predict.

"Markets don't go to zero, Portfolio's do.

Buy quality, be patient...and look twice for motorcycles."

- Clay Baker

Stay Invested,

Clay Baker

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Keep Me Honest 2019

  1. S&P 500 declines to 2,350 or more (1-3-2019)

  2. Healthcare and Biotech sectors outperform (1-3-2019)

  3. S&P reaches 3,000 by year end (1-11-2019)

  4. CSCO reaches $60/share (1-18-2019)

  5. VEEV reaches $145/share (2-14-2019) (achieved $145.23 on 5-10-2019)

  6. CVS reaches $91.50 (2-27-2019)

  7. Bull market takes another leg up (4-7-2019)

  8. The Fed will lower rates 1-2 times (5-13-2019)

Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't, Stay Invested

Rule #4: When a good stock you own drops 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Rule #7: When an investment bank sells below book value, buy it

Rule #8: Tips are for waiters. Do your own homework.

Rule #9: Don't sell a stock because you're bored with it. Do your own homework.

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

HD, AMRN, BSTC, CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD, HD, AWR, XLNX, MRVL, NBRV, ENPH

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved