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April 2020: Investing at the Bottom

Andrew is a self-educated business owner and entrepreneur with plenty of free advice (which is worth exactly what you pay for it!).

Adjusting to the New Normal

Immediately following the crash of 2020, it became evident to me that the rest of 2020 was unlikely to be similar to any previous stock market experiences in recent memory, and while there are commonalities in all markets, a crash caused by a pandemic, where the federal government was able to print trillions of dollars simply hadn't happened before. This was uncharted territory, but there was also time to take a breath and look around, and to consider what these changes meant for investing. Here are a few of those things that Tom and I were talking about, immediately following this conversation about the crash itself. Mostly, I ask a lot of questions and pick Tom's very experienced brain, but we both make some real-time observations about this experience that may be useful to look back on.


Finding Our Footing

Apr 2, 2020:

Andrew: End up going after any REITs? Just saw this and thought about our conversation:

Tom: Not yet. Waiting for market to retest lows.

Andrew: I picked up Welltower earlier in the week at a pretty good price, I think (we shall see). Currently investigating REITs as well, though in no rush. I agree with this strategy, generally, although we can't know for sure it'll happen... sure seems like it.

Tom: Yes I’ve already made enough good trades to be happy with my performance if the market doesn’t go down again. So if I don’t get a chance to buy REITs it’s fine. Not feeling like you have to do something is the best way to remain dispassionate/ objective I think.

Mostly focused on trading oil spot price (USO) and oil companies (XLE) which are more sensitive to prices further out on the forward curve. I’m guessing spot prices will fall to $10-15, where I plan to load up. Then oil companies will fall a bit later as the forward curve flattens. Then spot prices will rally this summer and I’ll sell USO and buy XLE. Then the companies will rally later in 2021 once vaccine comes out.
That’s the plan anyway. Subject to revision as events unfold of course.
And now, to stay patient. :)

Andrew: I really like the way Marks describes the "I don't know" school of investing, and I've since learned a great deal more about it from other investors. In other words, he'll have a few plans that work out if the vaccine is found in mid to late 2020, a few for early 2021, and maybe even a backup for no vaccine for the foreseeable future, with the idea being that each option can still make a little money regardless, but maybe one is a bigger winner.

I kinda feel that way about oil and about the vaccine itself. Gates wants to drive progress with the thing, and he is kind of his own potential black swan. He certainly has the network and resources to press for a vaccine.

On the other hand, I'm banking on nothing at all. If things get better, after all, I am in the same boat as you, I think - things will be great for a few years for my portfolio. If they continue to drop (a new low, or even worse), I should have some great buying opportunities.

Apr 3, 2020:

Tom: Just bought SCO (2x short oil). Short term trade for a few days.
10mm barrel cut isn’t going to stop storage from filling up because demand is down 20mm barrels.

Andrew: Yeah, it's nuts. They will rent ships to store all the oil (are already starting, from what I understand). It's gonna be ugly in the short term, although prices for the consumers (the ones actually driving) will continue to drop (may see gas prices we haven't seen since the late 90s!!!), which hey, that may help the economy a smidge... but even that is a piss in the proverbial ocean.
I've never done a short, call, or put. Is that something you think would be beneficial for me to learn about? I think security analysis and value investing is really the thing I'm (rightfully) focused on this year, and it makes sense since I've spent around the last 4 or 5 years focused on that approach.

Tom: Going short is more advanced for situations when you may want to tailor your macro exposure. Like long market index and short oil to take out that component. Or long individual value stocks and short a growth index to amplify exposure to value factor while reducing exposure to overall market. In this case I’m just making a short term bet since I happen to follow the oil and gas markets more closely than 95% of investors I think. I wouldn’t recommend it unless you just want to gamble. Sort of a real life example of that hypothetical bet with 200% upside and 100% downside we previously discussed.

Selling Stocks and Taxes

Tom: Just sold my short position in oil. Made 15% and probably should have held it but it’s one of those exposures where time isn’t on your side (bc it was 2x levered). It was bothering me and I don’t like positions that bother me lol.

Andrew: Yeah, I completely understand. I'm hanging onto the OXY and MPLX for now. Plenty of exposure to oil for my taste. I know it'll be near worthless for a while, but I don't think either company will go bankrupt... we'll see, though. I'm definitely fine if they do. When a company goes bankrupt, it's liquidated first and whatever they get goes to the shareholders, right? Ever have anything you own go bankrupt?
On the one hand, I'm thinking of liquidating OXY (seems most precarious right now) to harvest a solid tax loss, but on the other hand, I kind of like to watch the world burn

Tom: Usually there is nothing left after debt holders are paid. So equity holders get nothing.

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Andrew: Gotcha. So tax loss harvesting might be a good play here

Tom: Yes early on in tech wreck my employers portfolio had some stocks go to zero. Some small things in my own portfolio but was like 10 years ago and I forget which companies.

Andrew: On the other hand, if it drops to zero, don't I get to write 100% off?

Tom: Yes. If held less than a year, it counts against income. If held more than a year it counts against capital gains (I.e. less tax benefits bc capital gains rate is lower than income tax rate).

Andrew: Oh, nice! My favorite thing to do is usually nothing.

Oh hey, one other Q - if I sell at a profit, is it the same, but inverse? Like, sell the same year you buy = taxed at capital gains rate?

Tom: If sell within a year, it adds or subtracts from income. Depending on profit or loss. If sell after a year, it adds or subtracts from capital gains. So you want to hold your winners longer than a year and sell your losers in less than a year.

Andrew: Gotcha. Either way, I can write off the loss, so that is kind of a relief. I mean, making money has to be part of the game too, but if I miss on a few pitches, it's not such a huge deal, especially if I have profitable businesses as well. Am I assessing this reasonably?

Tom: Yes. If you don’t miss on a few pitches you’re not swinging enough. Long as you don’t throw a disc in your back!

April 2020 Covid Status, in a Nutshell

REITs, Oil, and Uber During the Pandemic

Apr 8, 2020

Andrew: I'm not super into alarmist headlines like this, but think there's some merit in the concept.

Tom: Been working on this idea. Only wrinkle is it could be like 2009 where lots of REITs did not fully recover because they were forced to issue more common equity shares near bottom of market to fund debt payments. So earnings recovered but share count was higher so earnings per share did not recover. However, preferred equity holders were not diluted so they did fully recover. Unfortunately I don’t know of find that focuses solely on preferred equity of REITs (excluding mortgage REITs, which are trash). Closest option would be PFXF. Currently trading near $17 and I’m confident it will get back to $20 within a year. But I’m greedy and may wait to pickup at $15 if we get another sell off. May buy 1% now and another 1% if get sell off.

Just sold XOP. Still fading this oil rally. But still holding XLE.

Andrew: Man, XOP is low. I know it's gonna go lower (I mean, I don't *know*, but of course it is) due to the protracted pissing contest and nobody going anywhere right now... but won't it recover longer term? You're selling for a shorter term play, right?

XLE makes sense to me as buy and hold, but I've personally got enough exposure in the energy sector right now (but would buy more D if cheap enough).

Changing the subject briefly, MGV is another really appealing longer play to me. Seems like it would do reasonably well through volatility, but really hold its own over the longer haul

Tom: Yes, selling XOP is short term trade.

Andrew: Do you draw a distinction between "trading" and "investing"? I was talking with Zach at our gym, and that's sort of how he thinks about this (I'm certainly much more in the "investing" camp)

Tom: Some people say trading is gambling. I say investing is also gambling, but over longer time frames, with different exposures. Ergo trading and investing are same in theory. But tactics are different in practice.

Reason most people have more confidence in investing is because they haven’t considered all the train wrecks in different places and times that the US market has thus far been lucky enough to avoid.

Andrew: Yeah, plus I do buy into the idea that, over time, the market is a weighing machine, not a popularity contest.... although there's plenty of variability and that's far from absolute, especially factoring politics and special interests, etc.

Tom: Wish I had a solution and ability to produce product to prevent Covid transmission during uber rides. Could make a killing right now. Instead of “do you want a water” it’s gonna be “do you want hand sanitizer and Lysol” for a long time I think

Andrew: Yeah. I'd say avoid Uber, unless you just wanna gamble. but hey, you could win big if it was a small enough portion of your portfolio.... would need to drop A LOT, though.

Printing Money and Modern Monetary Theory

Apr 9, 2020

Tom: Written by the FEDs mouthpiece reporter. Too bad the debt will be a drag on growth for years to come. Doesn’t have to be this way but regular people and the politicians they elect don’t understand money.

Andrew: Well, it is always politically easier to just print money. IMO raising taxes during prosperous times makes the most sense... but a household budget is certainly different than a national budget.

"Still, save during good times" seems to me like a very, very good common-sense mantra.

Tom: Hope there will be some money printing, but I think tea party types will want people to just be indentured servants to their lenders once this is over. Loan payments might be deferred but not forgiven despite having incomes reduced. Lower interest rates may help a bit, but consumer loan interest rates were high even before this event, despite low bond yields.

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