Investing / Holding / Selling / Rebalancing

[Shareguy]

Tuesday was not a good day for me. Not only did I have to watch the train wreck of Pacific Edge then came the loss of the Chemist Warehouse contract and Ebos taking a hammering.

I always find it hard when a share I invest in tanks. One thing I do is go back and look at why I invested in these shares in the first place. To me a loss is an expensive lesson that I need to learn from, therefore in future I will hopefully make smarter decisions. If I make the same mistake and I must admit I have in the past then the loss is just that "A LOSS WITH NO VALUE"

Pacific Edge was originally just a punt. I currently have about 20 percent of my portfolio in what I call punts with total loss a real possibility. I find punts fun and can be very rewarding but I realise that it's high risk and understand and accept the consequences.  With PEB I made a mistake by doubling my holding as it dropped. Some time after that I lost faith in the company and made a further mistake of holding and not selling.

I'm currently still holding after my sell order was not good enough. In time that might just be another mistake but my logic is that to sell at current level won't generate much money and realising the loss is final. From my point of view it's only a small holding and a benefit of having a well diversified portfolio. Unfortunately there were some people that face some very serious loss currently with this one.  I just don't like seeing red in my portfolio it hurts. luckily it does not happen often. I will continue to make punts so there will always be some that work out and some that don't. As I get older and hopefullly wiser, I will no doubt take less risk. This will mean my punting percentage will narrow and might even go completely.

Ebos is a different fish. It's one of my largest holdings and the share price drop is big money but still in the green as have sold a few and had for a while. Have gone through all available information and the same reasons I took a position in the first place are still there in my opinion. Will continue to hold and was hopeful that it would give me an opportunity to buy more. So far that has not been the case. Looking at the deal that Sigma offered I don't think the changes that Ebos wins it back in 3 years time are high. Only hope I think is that Sigma can't cope which is unlikely.

Sound proven management. Long history of EPS growth. Sounds like there are still plenty of acquisition opportunity's according to CEO. The board and management have a year before the loss of the CW contract takes affect. In years to come I think the growth will continue along with the share price with patient investors rewarded.

[Basil]

Feel for you mate, that's a very rough day to have those two things happen at once.
Buying in a confirmed downtrend is a VERY high risk strategy and something I have tried very hard to build discipline around over the years and generally avoid it unless I think the fundamental case is truly compelling.

Read an interesting article in the Herald recently, tried to dig it out but couldn't find it online.
Anyway the gist of it was the Covid wealth has gone.  Housing has fallen a lot, the amount of money on term deposit has fallen e.t.c.e.t.c....someone else might be able to find it but what I found most interesting was how our market has performed since the peak.  On 8 January 2021 the NZX50 (which is a gross index inclusive of dividends), was 13,558.  As of a couple of minutes ago it was 11,739.  The NZX50 index is down 13.5% inclusive of all dividends paid in the last 30 months !

Just for "fun" I plugged those numbers into the Reserve Bank inflation calculator and in real inflation adjusted terms including all dividends paid in the last 30 months the market is down ~ 25% !  Wow that's sobering stuff. 

Why do I look at these things ? Sometimes I find it really useful to do a stock take of how my portfolio has performed compared to the market over time.  That always cheers me up a bit even in a bear market.  I also find it brings me focus to reflect on the type of market we are in and helps me create strategies to manage the risk.

[winner (n)]

US markets in bull market territory

Over last while interest rates go up 500 points and equity prices also rise. And apparently conditions are tight.

I don't understand -

[Basil]

Maybe ask Chat GPT to explain it because I don't understand it either.
Interestingly, according to a CNBC poll last weekend of high net worth investors with more than a million dollars of investable assets, many do not trust the share market run in recent times and the average cash allocation in their portfolio's was just on 33%, at a record high level.
Now you can get 5-6% on call / short term deposit and we're in a confirmed down trending bear market, seems like a sensible risk management strategy to me.

[KW]

US markets in bull market territory

Over last while interest rates go up 500 points and equity prices also rise. And apparently conditions are tight.

I don't understand -

For the US at least, they have interest rates higher than their inflation rate.  Which is how it should be.  The stock market is forward looking, and over the last 18 months it has been continually pricing in higher interest rates, which increases the discount rate used to value company future cashflows, and higher rates lowers the value of those earnings and consequently the share price.  (Thats the FA analysis, there is a whole other TA one based around sentiment).  Now the end to rate rises is in sight (and even future rate decreases), so company growth rates can start being priced back in without more discounting, and share prices of growth oriented companies will start to rise again.  The stock market prices not for how things are today, but how it expects things to be in 12 months time.  The US is feeling pretty optimistic about next year.  Can't say the same about NZ as inflation is still raging, and even though the RBNZ has said its on hold, the market doesnt believe it.  Australia and Canada were also supposed to be "on hold" and both were forced to raise interest rates this week, and to raise the peak terminal rate.  This is now crushing consumer discretionary stocks like retailers in Australia, and the income stocks that the NZ market is stacked with.

A lot of money was parked in the "value" and "income" type companies, and what is now happening is that money is leaving those stocks and rotating back into growth companies, in particular tech and AI-adjacent stocks.  Money flow is what drives prices.  What I have been watching is the market breadth to see if the money flow was widespread (indicating a new bull market or at least a really good bear rally), or just concentrated in a handful of megacaps (a small number of crowded trades is a set up for a market crash).  Because of the huge contribution of the megacaps in the index, the "new bull market" is not as good as it seems (without those megacaps the S&P would not be in a bull market, it would be down 2%) but sentiment change will help pick up the rest of the market.  Watch the Russell 2000 for a trend reversal (its currently just basing in a fairly tight range).

There is an old adage "a bull market climbs a wall of worry".  Hopefully that is what the US market is doing.  As for NZ and Australia, we have further to go to get inflation under control, because its barely moved from its 7.1% peak. Which means further rate rises.  Or a recession which crushes the economy.  Which means further discounting.  Which means further equity price falls. 

[KW]

With PEB I made a mistake by doubling my holding as it dropped. Some time after that I lost faith in the company and made a further mistake of holding and not selling.

Everyone does this.  Everyone has this story.  Ask me about BIG sometime But you get punched in the stomach, you get up and vow never to do it again.  If you don't, then its an expensive lesson of great value.  The problem is when you go and do it again on something else.

This is where TA is your best friend.  If you are going to "take a punt" on something, do it on a stock in an uptrend.  If you lie down with dogs, you will get up with fleas.  There are plenty of crazy stupid punts over on the ASX that are ripping higher, you have a much greater chance of coming out with a profit on them than a stock that has been in a downtrend for a long time (see PEB chart). 

So after having been punched in the gut, I have learned ...
(a) not to hold a stock in a confirmed downtrend, the market always knows something is not right, even if you don't have a clue, and you will never know what you don't know so this is not something you can correct,
(b) never buy a stock in a confirmed downtrend, because punting on something to change is probably worse odds than walking into a casino and putting your money on black, and "averaging down" losses is a fools game
(c) when a confirmed downtrend becomes apparent, SELL.  Immediately.  There are plenty of other options you can cycle that cash into that will make you money, don't hang around waiting to lose even more, and
(d) even if you think all hope is lost, and that selling what meagre amount you have left is completely pointless, its not.  Even if you scrape up the last few dollars you have in it, you can put invest your punt funds into some tiny nano cap on the ASX in which a $5000 or even $500 investment could generate substantial returns.  If nothing else, removing that red entry from your portfolio is going to make you feel mentally better, rather than torturing yourself every time you log in.  Mental health is important.  Losses bring twice as much pain as gains bring pleasure.  So its important to move on from the loss.  Otherwise its just the emotionally destructive equivalent of looking at your ex's Facebook page each day.

Sadly none of this advice would have helped you with EBO.  Sometimes shit happens.  Just got to take it on the chin, and hope it wasnt a king hit.  At best EBO will probably range trade for a while, it seems to be sitting on a support level.  The problem is that you don't know how long it will range trade for, and you don't know how much financial damage the loss of that contract will actually do as you would need to know the margin on that contract, and whether the costs associated with it were fixed (they still remain) or variable (now gone).  This means that there is a high potential for future nasty surprises if the remaining revenue is insufficient to cover their fixed cost base.  You also don't know how much of their future growth was predicated on the growth of Chemist Warehouse (eg new stores in NZ, China and Ireland).  So ask yourself "Do I feel lucky?" and then see (a)-(d) above.

[BlackPeter]

US markets in bull market territory

Over last while interest rates go up 500 points and equity prices also rise. And apparently conditions are tight.

I don't understand -

Might have something to do with markets forward looking.

Just imagine the following scenarios:

• (1) Interest rates have peaked and moving downwards from here.
• (2) Russia has a change of leadership, the current leader gets disposed of dangling under one of the Volga bridges (following Mussolini's great example) and his successor sees economic reason, withdraws from an anyway lost war and and agrees to UN peacekeepers in the Ukraine - against a cancellation of all Western sanctions. Prices for energy and resources drop ... and the rebuild of the Ukraine is a huge push for industries world wide. Remember the "Wirtschaftswunder (economic miracle)" in the west after WW 2?
• (3) Trump disappears for life behind bars and the so called Grand Old Party regains sense and remembers that at some stage it was the task of politicians to work together to achieve the best outcome for the people instead of lifting the most corrupt and selfish person they can find into presidency. There is again some sense in US politics and both parties work together to further the interests of the US and the free world. Huge resources flow into rebuilding the ageing US infrastructure
• (4) The dear leader Xi dies unexpectedly (life is dangerous) and the next secretary is open to work with the rest of the world to further the interests of his country instead of against both.

Scenario 1 is pretty certain - and markets just looking through the next couple of months.
Scenario 2 is in the realms of possibility. Anybody remembers the end of the cold war? Nobody predicted that before as well.
Scenario 3 - I agree sounds unlikely, but lets not forget - after WW2 politicians and countries learned as well pretty fast to work together instead of against each other. It is possible.
Scenario 4 - again, not sure how likely, but not without precedent. Remember Zhou Enlai? Not every Chinese leader is an autocratic and power hungry ar*ehole without regard for the interest of his people.

Pick any 2 of the above scenarios - and a huge economic boom is likely to follow. Maybe markets are just forward looking and we don't see it yet?

[Cod]

Money flow is what drives prices. - KW

Where is the liquidity going to come from for higher highs on the S&P?
Below is a chart that shows traders short positioning & Money market flows.

Short positions in the S&P500 are now at levels that are greater than the GFC.
Money Market Assets just hit a record $5.5T this week.

You cannot view this attachment.

Make of it what you will.

[Stoploss]

Money flow is what drives prices. - KW

Where is the liquidity going to come from for higher highs on the S&P?
Below is a chart that shows traders short positioning & Money market flows.

Short positions in the S&P500 are now at levels that are greater than the GFC.
Money Market Assets just hit a record $5.5T this week.

You cannot view this attachment.

Make of it what you will.

COD how about this as a scenario .
Market keeps moving higher , some of the record amount of "shorts " begin to cover - forces the market higher ...
The $ 5.5 trillion sitting on the sidelines gets FOMO , believing there is a good rally in store helped by lower interest rates.......
 Sounds like a good money flow to me ?

[Cod]

Stoploss - Yes, that is one possible outcome, but I am careful not to predict, it is after all only two parts of the "Weight of the evidence data".

Cod

[KW]

Money flow is what drives prices. - KW

Where is the liquidity going to come from for higher highs on the S&P?
Below is a chart that shows traders short positioning & Money market flows.

Short positions in the S&P500 are now at levels that are greater than the GFC.
Money Market Assets just hit a record $5.5T this week.

From all that cash sitting in money market funds, just waiting for a signal to move back into growth assets.  Once they get a whiff that the bull market is on, that cash will move quick smart.

[Basil]

I'm not so sure about that.  Apart from the obvious worry about a potential hard economic landing I get the sense a lot of people are worried about the prospect of another black swan event.

[Fiordland Moose]

For the US at least, they have interest rates higher than their inflation rate.  Which is how it should be.  The stock market is forward looking, and over the last 18 months it has been continually pricing in higher interest rates, which increases the discount rate used to value company future cashflows, and higher rates lowers the value of those earnings and consequently the share price.  (Thats the FA analysis, there is a whole other TA one based around sentiment).  Now the end to rate rises is in sight (and even future rate decreases), so company growth rates can start being priced back in without more discounting, and share prices of growth oriented companies will start to rise again.  The stock market prices not for how things are today, but how it expects things to be in 12 months time.  The US is feeling pretty optimistic about next year.  Can't say the same about NZ as inflation is still raging, and even though the RBNZ has said its on hold, the market doesnt believe it.  Australia and Canada were also supposed to be "on hold" and both were forced to raise interest rates this week, and to raise the peak terminal rate.  This is now crushing consumer discretionary stocks like retailers in Australia, and the income stocks that the NZ market is stacked with.

A lot of money was parked in the "value" and "income" type companies, and what is now happening is that money is leaving those stocks and rotating back into growth companies, in particular tech and AI-adjacent stocks.  Money flow is what drives prices.  What I have been watching is the market breadth to see if the money flow was widespread (indicating a new bull market or at least a really good bear rally), or just concentrated in a handful of megacaps (a small number of crowded trades is a set up for a market crash).  Because of the huge contribution of the megacaps in the index, the "new bull market" is not as good as it seems (without those megacaps the S&P would not be in a bull market, it would be down 2%) but sentiment change will help pick up the rest of the market.  Watch the Russell 2000 for a trend reversal (its currently just basing in a fairly tight range).

There is an old adage "a bull market climbs a wall of worry".  Hopefully that is what the US market is doing.  As for NZ and Australia, we have further to go to get inflation under control, because its barely moved from its 7.1% peak. Which means further rate rises.  Or a recession which crushes the economy.  Which means further discounting.  Which means further equity price falls. 

very lucid & well written...thanks...

[BlackPeter]

I'm not so sure about that.  Apart from the obvious worry about a potential hard economic landing I get the sense a lot of people are worried about the prospect of another black swan event.

Don't they say the bull is climbing a wall of worries? Black Swan events are always in the wings ... even before they discovered Australia ;

No point either to keep too much cash for a black swan event ... they well might destroy the bank you're holding the cash in or the currency you are using. Anybody who is careful will diversify their holdings (next to other essential things) into companies producing essential stuff and property providing shelter. Holding (too much) cash can be a very dangerous thing in a black swan event.

[Nizzy]

I'm not so sure about that.  Apart from the obvious worry about a potential hard economic landing I get the sense a lot of people are worried about the prospect of another black swan event.

Yes, there's a great deal of generalised stress and worry out there. Multiple reasons, amplified by social media and all of us struggling with information overload.
And of course, while not a Black Swan as its entirely predictable, there is the changing demographics of the world's population and its massive impacts on political structures, on climate, etc etc
In just my lifetime the global population has risen from 2.7 bill to 8 billion. Extraordinary.
https://ourworldindata.org/world-population-growth