Olivier Le Moal
Process vs. Point
Many prudent investors have been reducing their equity exposures for some time. They have relied on equity investing as their main tool to meet long-term goals. They have been withdrawing a portion of their investment in stocks for some time. Many have reduced their equity holdings by around 30%. This is easier to do for individuals than institutions, who cannot hold a lot of cash. Institutions move into lower-volatility investments, hopefully temporarily.
The one thing we know about investing in stocks is that they go up and down occasionally by large amounts. After Friday’s close, all three of the main US stock indices and many international stock indices had fallen to lowest prices in at least in a year.
There is a feeling that this is an opportunity to reinvest in various stock markets, yet there is also a well-reasoned fear of even deeper bottoms ahead.
Long-term conservative investors have, in the past, recognized that it is much easier to identify a low-valuation price region than to pick a particular price re-entry point. I believe I won’t be able to identify an absolute bottom point until after it has been reached and probably tested by a subsequent decline that holds above a previous low point.
The very best I can do is believe many markets have entered a low price range. This range can last for an indefinite length of time based on known and unknown factors.
The process I will use for account responsibilities and my own accounts is to divide the maximum equity reinvestment into small purchase buckets, typically 5-10% of the total to be invested. That is the easiest part.
The two much tougher tasks are the planned frequencies and the individual selection of advisors, funds, and individual stocks.
Frequency of Investing
I don’t know what the future holds. Everything in life is a gamble from the time we get up in the morning, so we should have a plan. The plan is to lay out the first steps, which will likely be modified in the future.
For sake of argument, assume there are three planned frequencies. I will use time periods, but you could also use price levels. For illustration purposes, the three frequencies of time are monthly, quarterly, and annually. This is where judgement comes into the process, when to execute into each investment bucket.
To my mind, investing monthly assumes the main factors determining long-term results become clear within the next several months. This prediction is largely a price prediction. I don’t have confidence in my trading skills to recognize this kind of condition.
I believe the bear market we have recently entered will be followed by a structural economic recession. Causes of recessions are usually based on fundamental changes in people’s economic and political attitudes, not statistical measures. As these have not yet been identified, I prefer a quarterly reinvestment frequency, which could last two to five years.
Based on history, there have been at least two periods of stagflation lasting about ten years. In this scenario, I am prepared to shift my frequency to annual investing. (Sound corporations often use five years or longer for their critical investments.)
Because I can’t accurately predict future prices, I allow them to guide me in executing buy programs. When the price of a targeted investment is 10% below my last entry point, I delay future investment until the next scheduled time. If the price of the target investment drops 25%, I need to take a fresh and probably different view.
Current Picture
According to some statisticians, the average bear market decline from a prior peak is 37%. (Numbers and words share the same characteristic of being frequently misleading.)
The following table compares Friday’s closing price, its decline from the peak, and the remainder of a 37% retrenchment.
| Index | 9/30 close | %Fall from Peak | %Further |
| DJIA | 28,725.51 | -21.94% | -16.73% |
| S&P 500 | 3,585.62 | -25.25% | -15.72% |
| Nasdaq Composite | 10,575.62 | -33.20% | -4.34% |
The peak for the DJIA and S&P 500 was 1/04/22. The NASDAQ Composite peak was 11/19/21.
For those who can tolerate volatility caused by less liquidity, Nasdaq may give a bigger but more exciting ride.
Possible Strategies
Believing we are entering a new market and possibly a new economic phase, the reinvestment program should focus on different thought patterns. If the existing investments are sound, the new investments should hedge a major change, with an anchor windward.
Consider real estate, the worst-performing sector for at least a year, for a different thought pattern. They have suffered from the work-at-home syndrome, leaving lots of empty space in offices, city stores, and restaurants. Many real estate entrepreneurs are smart. The bet is that they will convert their space to residential or other productive use. Furthermore, current rising interest rates for mortgages will eventually top out, increasing the cash generation of sound property. This is a bottom-fishing candidate, but there are others.
Holdings missing from many portfolios are energy securities. The absence of some institutional money may be creating bargains. Too much attention is being paid to the price of oil and other commodities. The key to figuring out energy earnings being neglected by some in the market is the volume of product sold. I am guessing an average price for oil of $50-70 a barrel. Earnings of many oil companies will be higher than they are today, as demand destruction is taking place. This is an example of extrapolation, where the market sets stock prices based on today’s conditions and fails to discount future earnings that might be quite different rather than a mere extrapolation. Similar mispricing could lead to a good long-term hedge vehicle.
Question of the week: How much of your portfolio is in currently invested in unpopular stocks?
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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