Market Timing II
Since my last post, various indices have come down 12-15%. Some individual stocks are down considerably more. While I would love to claim prescience, the rapidity of the decline was due to luck more than anything else, and I have no illusions about my ability to predict short-term trends.
There are still very few companies that seem cheap to me, which may sound surprising given that the S&P 500 is off to its 5th worst start to a year in history. In particular, near-record corporate profit margins seem unsustainable, and a reduction in earnings power still doesn’t seem to be factored into most valuations, with or without a recession.
There are a few other things that worry me:
The continued tendency for retail investors to “buy the dip,” despite professed negative sentiment. This isn’t behavior you typically see at the “bottom”
The continued resilience of bubble assets like cryptocurrencies, NFTs and Tesla stock
The uncertainty of second order effects from record amounts of easy money, and how they play out in a more “normal” monetary environment
Many small / micro-cap stocks touted on Twitter and in quarterly fund letters from popular, self-proclaimed “value investors” still seem considerably overvalued
While startup / VC funding has taken a hit, it still seems frothy
On the other hand, there are some very high quality companies that appear to be trading for reasonable valuations. I wouldn’t exactly call them bargains, and if the market truly becomes fearful they could fall considerably more, but I think they offer a reasonable trade-off between quality and price. A few companies that I have recently purchased include: GOOGL, CTSH, BRK.B, AMZN and BKNG, which has reduced my cash position to 50%.
I’m not trying to do anything too complicated at this point. I’m looking for companies that are 1) reasonably cheap and 2) have higher degrees of certainty. For example, although some decent companies appear cheap, they lack certainty in the sense that they may:
Have high levels of debt
Have unproven paths to profitability (SPOT)
Have high concentration among one or two customers (MQ)
Be exposed to increasing geo-political tensions for which there might be a binary outcome (TSM, BASFY)
Be difficult to understand in terms of exposure to negative surprises (C)
Operate in an industry where the dynamics are rapidly changing (STLA, META, PARA)
It might make sense to diversify among a basket of these companies - cheap, but uncertain - in the future, but I’m not quite there yet.
Another thing that I have to consider is that I have a naturally bearish bias. Generally, I have the tendency to think that things will turn out worse than they actually do. Although my inclination is to “wait for things to get cheaper", some things are probably “cheap enough.”