Bert sent out an update to his subscribers which seemed very sensible and reassuring to me. I asked his permission if I could post substantial parts of it on this board and he kindly agreed. Let me say again that anyone in these high growth stocks who hasn’t sprung for the trivial price of a subscription to his Ticker Target is insane, as the cost is irrelevant compared to the investing ideas and words of wisdom you receive. I feel the same way, by the way, about the Motley Fool Rule Breakers and Stock Advisor. All you need is for one idea to click to pay for 50 years of subscriptions. (For example, I bought Shopify when they recommended it two months in a row in 2016, and it had quintupled in two years when I sold it. Compare THAT to the cost of a subscription!)
And of course try to restrain yourself from responding on the board! If you just have to say something about it I don’t mind you answering off-board directly to me.
Here are Bert’s words, lightly shortened and edited by me:
Last week was obviously the worst of the year, both for our portfolios and for the stock market as a whole. One thing to note in this kind of correction/bear market is that there has been no real place to hide. About the only place to hide has been in utilities or in cash, and hanging out in those kinds of assets implies a sense of market timing that I simply do not have and am unlikely to obtain.
I wrote earlier in the week about my thoughts on the outlook for the operational performance for the (growth) portfolio companies in the event of a recession. I will suggest that the share price performance lately has become completely disconnected from the operational outlook for these companies.
I have been through these periods of cognitive dissonance on various occasions. They are extremely stressful and can lead investors to throw in the towel. In the short-term stock prices are determined by supply/demand criteria, and there has been lots of supply and negligible demand from institutional buyers.
I am indebted to one subscriber for some of these comments that are reprised from a strategist at Raymond James. One factor that is weighing on stocks is that 150 hedge funds are closing their doors on December 31st. In addition, even hedge funds that are continuing have a 6-week withdrawal window that opened on 11/15.
Many hedge funds have materially under-performed this year. They were caught flat-footed by the rally in the first part of the year, they helped make the highs in the summer and have now been wrong-footed into the correction. In addition, there has been a brisk level of mutual fund redemptions coupled with tax loss selling… The global political instability, the fear of global recession and basically the fear of fear itself, has led to a crippling lack of confidence and risk taking on the part of portfolio managers. In turn, this has led to self-reinforcing “risk-off” trades, almost regardless of recommendations or presentations or valuation paradigms.
How does this end? One thing that has happened already is that Fed Governors have taken notice of the error of their latest moves. The New York Fed Governor, John Williams remarked that the Fed is open to rethinking rate hikes next year. He also suggested that the Fed would be listening to markets. And markets have spoken quite loudly. The fact is that the preservation of healthy capital markets, while not an explicit Fed mandate, is necessary in order to maintain full employment and economic growth. And most of the Fed Governors recognize that markets that are in disarray and capital flight are not healthy. The unwinding of the Fed’s balance sheet at $50 billion a month (Quantitative Tightening), makes no sense except to those wedded to some static view of the world. I think the idea that the Fed will not take reasonably bold steps to reverse policy errors is off base. I believe that the Fed Board will swing around to a far more accommodative policy shortly.
The other factor that is happening is or course that valuations are compressing at a furious clip. Not to restate the obvious, but an entity that is enjoying rapid growth and which has seen its share price fall 25%, is now selling for half the valuation or less that it had just a year ago.
Markets are made of the constant struggle between fear and greed. While fear is in the ascendant at the moment, the operational performance of high growth companies will be at levels that ultimately change the feelings of portfolio managers. Hedge funds are paid to invest and not to hold cash. And with the long bond yield backing down to just marginally above the inflation rate, holding cash is not a real alternative. At some point, holding low risk, low yield securities will give way, as it always has, to a thirst for better returns. At the moment, high growth names are seeing negative relative strength because that is where hedge funds have been going to raise capital, and thus that is the trade by quantitative funds who explicitly look for anomalies to trade against.
One thing I think worth noting. This is not the tech panic of 2000 or the financial crisis of 2007-8. The companies in the IT sector are real… They sell real things to normal enterprises. And they get paid cash to do so. They have a strong gross margin profile. And, the highest growth continues to go to companies with the most innovation. And there is no real asset bubble that is oppressing bank balance sheets. Residential real estate has seen some leveling off in terms of its value, but the kinds of financial misfeasance that broke bank balance sheets 10 years ago is not to be seen.
I have little doubt that most of you have seen your portfolios contract in a painful fashion. I know that has happened to me. And I don’t have the kind of second sight that might allow me to set a time and level for a turn-around. But I know that bottoms are made at times of disgust, feat and discouragement. And I have seen some of that already.
I am a long-term investor and I do not try to time the market. Markets will fluctuate. Painful as this has been for subscribers, and for me, it comes with the territory of investing in higher growth names. I try to find companies for you that have extraordinary prospects over the long term because of their disruptive technologies and market position… I strongly advise patience and fortitude in these frustrating times. I do not think I am a Pollyanna or that I am ignoring real risks. The Fed may not behave rationally. Some misguided government policy may lead to a problem that proves to be intractable. But that said, the IT sector is on sale now. The sale might last a bit longer. I really can’t foretell the specific event that will break the pessimistic, self-reinforcing cycle. But markets are eventually rational, even if that is not totally visible at this point.