Mike Lipper’s Monday Morning Musings
Begin
to Dollar Cost Average the Equity Process
Editors:
Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
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 Fridays 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% to 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&P500 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?
Did
you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2022/09/if-not-bottom-then-what-weekly-blog-752.html
https://mikelipper.blogspot.com/2022/08/4-5-changes-disruptions-faulty-weekly.html
https://mikelipper.blogspot.com/2022/08/mikelippers-monday-morning-musings.html
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