Sixth
pin stuck in the newspaper
In recent weeks and months some of the most popular
articles on the Seekingalpha.com website have been warning of an imminent stock
market crash. So we are in the middle of the biggest bull market of our
generation and investors get bearish. You gotta love it.
Let’s insert some comments from Bill Miller’s Q3
2021 Market Letter to put things into perspective. Basically Bill is phrasing
it better than Holland Park Capital London ever could;
1. The
US stock market has gone up in around 70% of the years because the US economy
grows most of the time.
2. No
one has privileged access to the future so forecasting the market is a waste of
time.
3. Odds
like 70% of the time US stocks go up are great. Odds much less favorable than
that have made casino owners very rich, yet most investors try to guess the 30%
of the time that stocks decline, or even
worse spend time trying to surf, to no avail, the quarterly up and down waves
in the stock market.
4. Bill
believes that; “Time, not timing, is key to building wealth in the stock
market.”
So basically the mantra is “don’t worry, be happy”.
Focus your energy on selecting good long-term investments, buy those and hold
those. This is much more productive and efficient than worrying like everyone
else in the stock market an inordinate amount of time.
The P/E ratio of the S&P 500 is 27.07 according
to the latest reading on the ycharts.com website. The forward looking P/E ratio
of the S&P 500 is 21.3 for Q4 2022 according to the ycharts.com website.
The average P/E ratio for the S&P 500 has historically ranged from 13 to
15. Historically interest rates were a lot higher than the interest rates are
now. With these low interest rates higher P/E ratios actually make sense. Even
in the 2008 – 2010 periods the US 30 year Treasury bond rate yield was still
above 4%. Now that bond yield is under 2%. So if one compares asset classes and
specifically bonds versus equities one could make the case that the forward
looking P/E ratio should be double the historical average as the bond yield has
more than halved as well. So a two times 13 is 26 forward looking P/E ratio of
the S&P 500 would be very fair compared to US bond yields. That would still
leave 22% upside for the S&P 500 index for 2022 on the back of an envelope.
Double digit compounding returns are not to be sniffed at.
Earnings of companies are still all over the place.
The earliest we can expect earnings to normalize is in 2023. This year (2021)
performance on average has been very good for companies with very bad stock
market performance in 2020 and vice versa. It will be interesting to see what
will happen with performance in 2022.
It has been almost 2 years ago now that China
alerted the world to the new Corona virus. Still some countries are having
lockdowns at the moment which will distort supply chains and earnings. Lockdowns
are likely to continue in some countries in 2022. Basically the government of
the lockdown countries are admitting they are incompetent as those countries
still haven’t build proper lines of defense against the virus even after almost
2 full years. Those politicians have probably just been very busy tanning
themselves on the beach rather than leading their countries out of the hole.
Above: Tanning on the beach impression from a six year old....
Warren Buffett’s recommendation to just buy the
S&P 500 index has been well documented. His 90% S&P 500 and 10% cash
asset allocation advice has gotten rather less attention. How much equity
exposure does one need to sacrifice for defense going into retirement? This is
a tricky question that if you were to ask it to ten different financial
advisors, you would likely get ten different answers.
Jim Sloan
has a great article on the Seekingalpha.com website called “Why Buffett's 90/10
Allocation Drubs The 60-40 Portfolio - Especially With Rising Inflation”. For the investors
that worry this article may be especially useful. A cash holding of 10% of the
value of your portfolio does a better job according to Jim than the 60-40
portfolio a lot of retired people are sticking with. Cash can be seen as your
insurance. It may be costly insurance but it allows you to take advantage of
the great odds of the stock market with the other 90% of your portfolio.
Now it is time for an update in the crayon versus
monkey experiment run on the back of the book ‘Beat the Stock Market Casino’.
This experiment is run in order to support the thesis of the book that do it
yourself (DIY) investors with a good investment plan are more than capable of
making money in the stock market.
Holland Park Capital London doesn’t want to look
arrogant or boastful with this experiment. This is simply intended to
illustrate the investment journey on the back of the book “Beat the Stock
Market Casino” for a “Do It Yourself” investor for information purposes only.
It also helps Holland Park Capital London to think a little more deeply about
some investments considering the investments are going to be written down
publicly shortly after that. It focuses the mind. Hopefully this will give
better future results. Cestrian Capital
Research does something similar but just phrases it better.
As per
Cestrian Capital Research on their blog about Coinbase on seekingalpha.com from
the 19th of November 2021;
“These
days we run our own money and we write about it mainly to force ourselves to do
the work properly, the way you have to if you run other people’s money. The
risk of looking like idiots in our analyst services isn’t quite as motivating
as the risk of handing retirement systems losses … but it’s still motivating.
And so, we try to do it right.”
It is about time to stick the sixth pin into the
quotation page of a financial newspaper and pick a (none $ listed and none £
listed) stock.
First though let’s have a look at how the monkey
and crayon portfolio have done so far.
The monkey portfolio is still making money if
barely. The monkey portfolio is up $384 according to the Stockrover.com website
since inception (on the 25th of November 2021). Around $32542 has
been invested in the monkey portfolio so far on paper. The holdings in the
monkey portfolio so far are if anything value stocks. For this bull market
though goes that if you pay peanuts, so you get monkeys. The tracking websites
do not seem to take dividend payments into account though. The cash level in
the tracking website stays at zero and the cost basis per share are unchanged
from inception. So the dividend adjusted return is actually higher for the
monkey portfolio. Stockrover for example guesses that the current monkey
portfolio will pay $1572 in dividends in 2022.
The crayon portfolio was luckier so far. The crayon
portfolio is up about $33197 according to the Stockrover.com website since
inception. Around $32206 has been invested in the crayon portfolio so far on
paper. The real performance difference between the monkey and the crayon is
less than it appears as the current crayon portfolio will only pay $558 in
dividends in 2022 thinks Stockrover.
Because the
monkey portfolio still makes money the sixth position will have a new position
value of about $5000 according to the “no capital gain taxes growth investment
plan” in the book ‘Beat the Stock Market Casino’.
Have you bought the book yet on Amazon?
The crayon portfolio follows where the monkey
portfolio leads to keep things simple and comparable.
The Sigfig website has the monkey paper portfolio
as up by 1.2% now since the purchase of the holdings. The crayon paper
portfolio is up by 103% according to that same website. The crayon paper
portfolio has 3 out of 5 positions that have doubled by now; Ashtead, ASML and
MSCI. Not bad. The last two additions in the crayon portfolio are faring worse.
Games Workshop is losing the crayon portfolio money and United Health is only
up small. The Stockrover.com website has the S&P 500 index up as 73.1%
since the 15th of May 2019. Beating the S&P 500 index would be
nice, but first things first let the portfolios make more money than cash on a
bank account would be a good start as that is one of the alternatives in the
asset allocation.
Clearly a portfolio with only five holdings is
still way off from a diversified portfolio... So both the monkey and crayon
portfolio are still extremely risky, but the plan is to add another holding to
both portfolios every 6 months so both paper portfolios will get diversified
eventually... Plus both portfolios are being “time diversified” as well and at
least that is reducing risk. A combination of the crayon and the monkey
portfolio would be up 67.4% according to the Stockrover.com website.
The monkey has no opinion and no knowledge. Just
sticking to an investment plan and throwing darts at the quotation page of the
FT or Wall Street Journal will do the trick of making money. Holland Park
Capital London would bet that the monkey portfolio after another 8 years will
consistently make money. Time in the market and a diversified portfolio are
hard to beat. Put your money where your mouth is. While the monkey and crayon
portfolios are paper portfolios, Holland Park Capital London has a holding in
all the stock holdings of those portfolios. Just not the same amount of shares
per holding as the paper portfolios.
For the sixth round the yellow highlighter landed
on the French listed stock Societe Generale SA (GLE) of the quotations page of
the FT newspaper. For easier tracking the US listing of this stock was selected
for the monkey paper portfolio. For the monkey portfolio a paper transaction
was added to the paper portfolio of 786 shares of the Societe Generale SA OTC
listing SCGLY at $6.34 (on the 26th of November 2021). That
transaction had a value of about $5000. This is the second bank that the monkey
portfolio has selected now. Holland Park Capital London is not keen on banks
but of course the market cap indexes are full of them. The newspapers are more
likely to only show stock quotations of the large indexes so that is the
downside of following the monkey way of selecting stocks.
For the crayon portfolio a paper transaction was added to the crayon paper portfolio of Argenx Se (ARGX) in Belgium so also in listed in the euro currency. For ease of tracking the Nasdaq listed ARGX in $ was actually added to the experiment instead of the Brussels listing. For the crayon portfolio 17 shares of the Argenx SE OTC listing ARGX at $285 were selected for the paper portfolio (also on the 26th of November 2021). That transaction value on paper was about $5000 as well.
Both paper portfolios have 6 holdings now. Slowly
but surely the portfolios start looking a little like diversified portfolios.
May the force be with both paper portfolios. Thanks for reading this blog.
Holland
Park Capital London hopes you enjoyed the information in the blog. Holland Park
Capital London Ltd is not receiving any compensation from anyone to write this
blog. Holland Park Capital London is long the stocks in the crayon portfolio
and the monkey portfolio. Holland Park Capital London Ltd just doesn’t have the
same amount of shares per holding as the paper crayon and monkey portfolios. Holland
Park Capital London Ltd is also long the S&P 500 index. Holland Park
Capital London has a holding in the stock Coinbase as well. Holland Park
Capital London has no business relationship with any company whose stock is
mentioned in this blog. Holland Park Capital London expressed its own opinions.
This is not advice. Make your own decisions please. Do your own research.
Please go and see an authorized financial advisor before making any investment
decisions. What works for Holland Park Capital London may well not work for you
and your personal situation is unknown to Holland Park Capital London. Stocks
go up as well as down and you may get back less than you invest. Your capital
is at risk when you invest in stocks. In other words you can lose all your
money by investing in stocks. Any information in this blog should be considered
general information and not relied on as a formal investment recommendation.
This blog is for information purposes only and helps Holland Park Capital
London expand on the book “Beat the Stock Market Casino” and brings extra
discipline in the investment process. Holland Park Capital London Ltd is not
liable for any mistakes in this blog. This blog cannot be a substitute for
comprehensive investment analysis. Any analysis presented in this blog is
illustrative in nature, limited in scope, based on an incomplete set of
information and has limitations to its accuracy. The information upon which
this blog is based was obtained from sources believed to be reliable, but has
not been independently verified. Therefore the accuracy cannot be guaranteed.
Any opinions are as of the date of publication and are subject to change
without notice.
