Andrew is a self-educated business owner and entrepreneur with plenty of free advice (which is worth exactly what you pay for it!).
As I look back on this conversation, I'm astounded at just how much I've learned in less than a year. Put another (less flattering) way, I can see very clearly just how little I knew about how investing worked back in March of 2020. In spite of reading all of Warren Buffett's letters to shareholders, having immersed myself as much as possible in learning about how to invest and what the financial markets were, I was a "white belt" when it came to stocks. Lucky for me, I had Tom along for the ride, who was more than willing to discuss concepts that were confusing to me. We pick up our journey at the start of one of the most interesting periods in the history of the stock market: the 2020 crash. Note: this is a part of a series of articles based on candid conversations I had with Tom, all about value investing and portfolio management. You can find our first one here.
Tom: Just FYI I sold my mining and energy exposures. I’m thinking the narrative around Coronavirus hopefully being contained will soon break down, which will cause a sell off. Ultimately I think things will bounce back, but it will get worse before it gets better and that is not currently being priced by the market. So I will look to get back in later at a better entry point.
Andrew: Interesting. Mining includes COPX, ya? To me, it still looks like CopX is super cheap, at least based on history, so I'll hang onto it for at least a while, I think. You're thinking coronavirus gets way worse, and leads to a massive buying opportunity, right?
I had no idea what was about to happen.
Andrew: I need to show you my individual investment portfolio some time soon. I'm certainly speculating more with these initial buys, but feel there may have been some good bargains. Time will tell, of course.
Tom: Just save some powder for later in case even better deals come along. When the first mass quarantine happens in US should be a good buying opportunity.
Andrew: Will do! I'm still keeping the overwhelming majority of my funds liquid (money market and savings), besides what I already have in the Roth and traditional IRAs. The brokerage account for me has money market funds (which I use to purchase individual securities) and it's mainly comprised of the money market + a total world fund. Definitely not too many eggs in any one basket, at least as far as my personal risk tolerance goes.
Tom: FYI I will likely be buying oil and gas exposure tomorrow. About 25% of what I intend to fully deploy. Tickers XOP and FCG and OIL.
Andrew: I bought MLPX and OXY today, and lots.
Tom: I put in my orders as soon as market opened and they got filled right before the 15- mins circuit breaker kicked in. Had an immediate gain when trading resumed but gave it back at end of day. But no need to hurry to build positions until a city is quarantined.
Andrew: I actually started trading right after the "breaker" flipped, so I put in some limit orders and got both bids I was asking for (called Vanguard since I didn't understand the failsafe mechanism at first, but then I got it). After that, I probably added like 10 additional buys. Still have cash reserves, too.
I bet everyone understands a lot better why Buffet had $128 billion in cash.
"But no need to hurry to build positions until a city is quarantined." What does this last bit mean?
Tom: Means I’m guessing the market will bottom around the time when the first American City is put under quarantine. No need to spend all your money before then.
Andrew: Ahhhh, yes. Of course. I'm buying in stages, and I agree. I did get a little excited yesterday, though, but only because it was like nothing we've seen in more than 10 years. But yeah, hanging onto cash for opportunities.
I may consider selling if there's enough volatility on my "frequency" bucket. I'm definitely good with holding all of these for the next 20 years or longer if need be, although if there's a crazy opportunity to sell, I'd even sell my home (price would have to be ridiculously high, though!). I did make a bunch of oil buys yesterday, though. I think I'm okay as long as none of them go out of business
Tom: Oxy just cut dividend but stock is up so you’re good.
Andrew: What do you think of XOP for a longer term play? I probably should temper my impulses to buy for a bit, but it seems like there's little long term downside due to volatility, since it's a diversified group. I mean, if one or two go out of business, the rest would carry it back up, no? Don't answer if this puts you in an uncomfortable spot. Just happy to have some thoughtful reflection
Tom: ...Just realize most of those stocks are essentially just call options at this point. Meaning it’s not enough to be directionally correct, you have to be correct within a certain time period or else they will go bankrupt. The ones that don’t go bankrupt may get bought by large cap companies at depressed prices before you get to see a recovery.
Today I added a 1% position in XLE which has large cap companies that will survive, so time is on your side.
Andrew: Gotcha, makes sense. I understand the risk of bankruptcy, and can see how politics will inevitably play a huge role in my overall investment strategy going forward. You just can't do this until you're using real money.
I guess it's sort of up to Putin at this point. I feel he has the upper hand, which I guess shouldn't be surprising. Not caring about your people (or anyone's people, really) kind of helps.
Tom: I’m a slow learner but after being professionally involved with investments for 20 years including two recessions, even I was able to learn a few things. The best thing about starting your own investing in this kind of market environment is you will be forced to learn faster
This Happened Between the Above and Below Conversations
Mar 15, 2020:
Tom: Hearing and seeing rumors about mandatory quarantines and/or martial law within next two days. Tomorrow may be a good time to add exposure if the market is down (as futures indicate). Sentiment seems to have quickly caught up to reality this week. Basically my plan here on out is to add % of exposure every day that the market is down. If it’s down 5%, I’ll add 5% exposure. If it’s down 2%, I’ll add 2% exposure. Won’t do anything on up days.
Mar 16, 2020, 9:19 AM:
Andrew: It's down like 10% right now! Anyway, I did put in some bids. Building in an extra margin of safety, though. I did put in a low-ball bid for Vanguard Small-Cap Value ETF. Thought you might be interested since that's your area of expertise. Small cap companies will be hurt by all this, but it also seems tough to say how the gov't response will be. Also bid on WCC
Tom: Actually my specialties are real estate, energy, and mining. All of which are attractive now. RWR, XLE, COPX, SIL.
Andrew: I'm really interested in more COPX, although I have a fair bit of exposure. Do you think it's dropping because of just pure panic? It should theoretically be inversely correlated with stocks
Tom: No it’s not inversely correlated with stocks. Dropping bc of short term demand concerns. But most market participants don’t realize supplies will fall and that will help prices longer term. Also, low energy prices means lower expenses for these companies.
Andrew: Gotcha. So their cost to get stuff out of the ground will be lower, which is no doubt a KPI for them, right?
Andrew: I low-balled COPX and got it at the end of the day for $10.50-ish/share. That's way, way lower than what I got it for last week and the week before, but I bet buying in stages is the way to go during this crazy time. We shall see!
Tom: Yep. Nibble. Don’t feast. Pigs get fat. Hogs get slaughtered.
Andrew: Any interest in seeing what else I got today?
Tom: Totally. Times like this are what I live for (professionally speaking)
Andrew: The big one-off purchase is the owners of Corona beer. I simply could not resist (plus they own medical cannabis). I've vetted all of the recent buys on Morningstar as well; all have been 4 or 5 star buys lately.
Tom: Nice. Constellation is the company that my company’s vineyard sells grapes to. Part of the farmland portfolio I look after.
Andrew: Nice. I really, really like Wesco right now, and think it might double over a year or two. I've been a fan of Capital One for a while, but as you pointed out, should probably limit my exposure somewhat... but that price!
Tom: Have a look at SIL. It broke down today.
Andrew: I'd definitely expect precious metals to be inversely correlated with the markets, and from what I have read, that is normally the case, but maybe not with mining-based ETFs.
Tom: Gold is usually inversely related. Everything else moves with the market in short run.
Andrew: Gotcha. But even gold dipped with this crash.
Tom: Yes that’s how you know the market is stressed. Ppl selling whatever is not dead in order to meet margin calls on other stuff. Classic contagion.
Andrew: Think the Dow will drop to 10,000 again?
Tom: Depends how quickly the govt provides meaningful fiscal support. If not meaningful then market may fall 50-70% in total. If meaningful then we’re probably close to the bottom already. Either way prices probably higher in a couple years after get vaccinations.
Andrew: 50-70% from pre-crash highs, near 30,000? So maybe 12,000 ish?
Andrew: Yeah, I can see that. or not - who the hell knows. I agree that it is up to (gasp) the government. Oh boy.
Money Printer Go BRRRR, 2020 Version
Indeed, the government did have a massive say on the stock market recovery, which completely blew most analysts' expectations out of the water. You can read my post-crash analysis here if you're interested. In a very short period of time, as Tom predicted, I was able to learn a great deal about how investing works. Looking back on this experience—only 9 months ago as I write this—I can see just how naive I was going in, but also how enthusiastic about learning, especially since I now found myself stuck at home and unable to do jiu jitsu for the foreseeable future. All things considered, I probably gained about three years' worth of experience in six months, during a unique time in the market, and I was incredibly glad to have Tom along to help me process this experience. I still have a long way to go with understanding investing, but I feel infinitely more competent than I felt pre-crisis, although my primary assumptions about contrarian investing proved to be effective during a crash, and I'm incredibly glad that was the case.