My BS talking on asset allocation

Recently a friend asked me which investment portfolio will be better, stocks only or stocks with other asset classes. This is a good asset allocation question and here is my response: This is basically a asset allocation question. Most of people won’t realize it but appropriate asset allocation is considered the most critical factor determining the effectiveness of wealth growth. Of course there is always exception that few gurus only put money in very concentrated few stocks and still be very successful. But for the vast majority of people, a diversified asset allocation is always better than narrowly concentrated portfolio with much less risk involved for long term investment. So at a high level to answer your question, I would certainly suggest to avoid stocks only investment but investing in major assets like stocks as well as bonds, real estate, precious metals etc. Life insurance may not sound like an investment but personally I treat it as an alternative to bonds. As you may know I personally don’t like IUL but CV focused WL. Asset allocation is a big and complex topic with a lot of personal touch involved. I’ll write more later to share my personal view on it.  

As I said before, I have never expected my opinion will be agreed upon by everyone as I often disagree with many others. Sure enough, I immediately see some criticism on my asset allocation philosophy and this time is it even a bit harsh: I’m considered to be talking BS.😒😒 For one reason, it is said all assets will go down together when the market is crashing. For another, one should not put money into bonds when the interest rate is going up. It is not an unreasonable rebuke actually but as I said, asset allocation is a very complex topic and the details involved are critically important to fully assess whether a diversified asset allocation makes sense. So let me add a bit more flavor to my BS to see if it makes my asset allocation philosophy less BS. 😜😜Joking aside, let me start with the following chart that compares S&P vs Gold (GLD), gold stocks (GDX) and Treasury bond (TLT) during the worst market crash in 2008-2009 in the recent history.

  Do you see an all-together crash among the four? Apparently not! When S&P stocks plunged 30-50% during 2008-2012, gold shot up 150%, gold stocks and bonds jumped up 20-30% as well.  This is one real life example to demonstrate why a diversified asset allocation for your portfolio could be very important to stabilize your asset value during a bear market. Having said that, I do agree nowadays most assets, if not all, are more and more intertwined and correlated to each other to various degrees. A total separation from each other is not always possible, especially at a random given time point. But over time, the tendency is still there that stocks tend to go inversely with bonds and precious metals may tend not to go together with stocks. Even when they go down together at a time, the degree of decline may be very different, hence lessen the pain of a drastic devaluation of a diversified portfolio.

Now comes to the point of bond investment. This is even more complicated and therefore let me spend a bit more time to explain. But first of all, let me be very clear upfront that I have been bearish for bond in general for quite some time already and have talked against buying bonds purely for investment purposes. Here is what I said a few months ago: As a general rule, you don’t want to buy bonds, especially long term bonds just for higher interest income as you will be hurt more when the underlying bond values decline. Of course, as part of asset allocation for your whole portfolio, bonds should always be part of it and for that reason, buying some bonds is reasonable. Personally I don’t want too much of it. I highly suggest you read this blog again for a more comprehensive understanding about my view on bonds.  Having said that, keeping some money in bonds as part of asset allocation for your portfolio is a wise strategy in my mind. At least there are three ways one may consider.

• Short term Treasury bonds. While it is critically important that one should not commit to long term bonds as they are subject to sharp devaluation due to increasing interest rate, the risk of investing in short term bonds is quite low and virtually none when talking about short term Treasury bonds. Why so? Well, for Treasury bonds, it is a legal obligation for the US government to pay the interests and the principle fully back at maturity. The chance for the US government to go broke and not to meet the obligation for the next few years can be considered zero. That’s why the US Treasury is often treated as equivalent to cash. It is very easy to open an account with the U.S. Treasury at its Treasury Direct website ( link to the Treasury Direct website). It just takes a few minutes to complete the forms and then you can link this account to your bank account. When this is set up, you can look into pre-schedule bids in any bill auctions that interest you.  Let’s say you are interested in the four-week auctions (as I’d suggest to go for short-term bids) and get them.  You should see the Treasury Bills in your account with the corresponding interest rate and maturity date. Four weeks later, the bills get redeemed, and the principal plus interest is deposited back into your bank account. If you don’t need the money right away, you can schedule the bills to roll over for another four weeks. The interest rate keep changing of course at each bid. As of now, the 4-weeks Treasury yields about 1.5-2% annually, a much better interest than your bank account for sure.

Of course, you won’t get rich by investing in such short-term Treasury bills but it is extremely safe and secured with zero downside risk regardless how badly the stock and bond markets may go as long as you hold them to maturity for 4 weeks. The idea is to keep portion of your portfolio in such super safe bonds to ensure the overall downside risk is reduced to the extent you want. It is a personal preference regarding the portion size for your portfolio; the bigger, the less downside risk. This short term rollover strategy is especially favorable in an increasing interest era, since you will get higher interest rates along with each bid if the overall interest rate is going up. If the stock market indeed crashes at some point (trust me it will come and probably more severe than the 2008 crisis), your money in this portion is not only kept safe and intact, it can also be used to buy lows when everything is on sales in the stock market. That’s the beauty of an appropriate asset allocation with some low risk bonds like short term Treasury bills. Just note, 4 weeks term is just an example and there are many different time duration like 6 months, 12 months or 24 months etc. In general, bonds for 5 years and below have less impact from the interest rate hike and the key is to find a duration that you feel comfortable to hold on for the whole period. Then your downside risk is minimized.   

• Distressed corporate bonds. This is a more specialized investing arena and more for experienced bond investors. In a nutshell, during panic selloff everything will be on sales. Then savvy investors may find gems in the rocks as some corporate bonds with little chance of default may also be sold on huge discount. Have you heard Howard Marks? He is a legendary distressed-debt investor, a truly maestro of distressed debt! He started his high-yield debt investment career back in 1978 and he has made his funds' investors average annualized gains of 19% over the past 25 years. You can hardly find anyone one who can do this even in the stock market, let alone in the bond market. You may find more details about him here.  I personally also know some gurus who made 30-50% consistently from distressed bonds during 2008-2009. As I have alluded to before, we may start to see a huge run on corporate bonds within the next 5 years. Actually it may start as early as next year. Why? There are trillion dollars of corporate bonds that will be due to rollover in the next 2 years. Probably half of them are issued by those companies that have no cash flow to support the debt. They will be in big trouble to rollover their debt when the interest rate is going up. We are going to see real fireworks to play out when more and more companies cannot serve their debts and go defaulted. That will be the Lehman Brothers moment that may likely trigger a domino fall in the bond market and then the stock market. And that will also be the thriving moment for the savvy distressed debt investors.
• Life insurance. I have talked about the great benefits of life insurance many times (see here and here). But you may wonder what’s the deal to link life insurance to bond investment? Well, to me a good and cost-effective life insurance is a great alternative to bond investment and as such, could also be treated as part of the asset allocation in lieu of the direct investment in bonds. You see, for the vast majority of folks, bond investing is not an easy job in the interest-increasing environment. The short-term Treasury bills, while extremely safe, are rather low in return. Distressed bonds are too technical and challenging for most people. But life insurance companies are basically doing bond investment for their business. They hold tens of millions of funds and have top bond experts to manage and carry out various sophisticated and safe bond investment strategies that cannot be done by individual investors like you and me. The key is to find good insurance companies with long term track records and to set it up with reasonable cost. And for safety reason, I’m only interested in non-stock based permanent life insurance that will guarantee a base return via increasing cash value in addition to death benefits. Here are a few key points that convince me to include life insurance as part of my overall asset allocation strategy.
  • It is my firm belief that we are going into a long lasting interest increase era. If history is any indicator, it tends to last for decades. In this environment, it is very difficult for retail investors to make good returns from bonds. But history has demonstrated that insurance companies are generally doing well in high interest/inflation era as they do have the needed expertise for bond investment. By setting up a life insurance, I’m basically hiring an bond expert to invest for me with guaranteed tax-free minimal return (5% for my policy as of now with 4% fixed plus 1% floating dividend). If I’m right, the return could be much higher in the future as historical dividend return (1% for now) could go up to 10% as they did in the last peak interest time (80s-90s). So I’m really expecting 5-10% total tax-free return in an extremely safe bond investment from my life insurance during the time the bond investment is typically not performing well for general people.
  • Of course, I could be wrong and interest rates could just stay as low as now. But regardless, I’m still at least getting a 5% return tax-free (equivalent to 7-8% before tax for my tax rate). Should I complain for this asset allocation portion that will keep my portfolio very safe?
  • Another very important factor for me is to know that this type of cash value (CV) growing life insurance is almost like a high yield saving account that I can use the CV anytime and for any purposes, even since day one. It is my money to use with no credit impact whatsoever! As a side note, our family has just got two living examples of using CV: my son is using his CV to pay for his tuition for his MBA (it is not a small amount) and I’m using my CV to pay off my second home mortgage with a 5/1 arm that has come to its end. The process is extremely smooth and just like withdrawing money from my saving account without any headache.
    As you know I’m holding a very bearish view of the stock market in the next 5-10 years. I think the chance is very high that we will be hit by another major financial crisis down the road due to historically high debt burden that has been piled up for decades, especially in the past 10 years. If this reckoning unfortunately comes indeed, everyone’s stock portfolio will be hit significantly to the downside, but my life insurance will stay intact regardless how bad the market goes. Even more beautifully, I can use the big chunk of my CV accumulated safely in the policy to buy good stocks on huge sales. I wish I could do more buying during the 2008/09 crisis but my money was largely tied up with stocks already and I couldn’t be doing much more than what I had wished. But I’m mentally and monetarily ready now for the moment to come to do more aggressive bottom fishing when such kind of historical moment presents itself!

One million percent inflation

If I’m telling you that inflation can reach to the point of 1,000,000% and a currency can be devalued by 95% overnight, you must think I’m talking about something fictional that cannot happen in real life. In fact, I’m talking a real story that is still ongoing unfortunately!

About 5 years ago we visited Panama and fell in love with it immediately. So we decided to look into its housing market while being there. We met a beautiful female real estate agent who showed us some properties. During the causal talk, we learnt that she was from Venezuela. “Why did you move here?” I was curious as I thought Venezuela was richer than Panama back then. “Well, we don’t like what the government is doing and a lot of people of middle or upper classes are worried about what is going on in the country!” In hindsight, I must say this girl and her family are very visionary. They have foreseen and avoided an epic human disaster that could have totally destroyed them otherwise if they didn’t fleet the country! Venezuela, a once most affluent country in Latin America, has totally collapsed. Just weeks ago, its currency, bolivar, has been devalued by 95% overnight and its annualized inflation is reaching an unbelievable 1 million percent now! You have to pay millions of bolivar to just buy one bread there. So how Venezuela, the country with the largest oil reserve and was extremely affluent just years ago, would fall apart so much so fast? There are many things they can blame but one fundamental culprit has to be rooted back to their extremely popular late President Chávez and his socialist policies. The key element of the socialism experiment conducted by Chavez with a good will was redistribution of wealth to help the poor. For example, against the basic economic rule, Chaves implemented price control to make basic goods more affordable to the poor by capping the price of flour, cooking oil and toiletries. Of course, it was an extremely popular and welcome policy among the vast majority of people in Venezuela as they were virtually getting a lot of things like free lunch. But unfortunately anything against the basic economic rules cannot continue for long and they have to pay the price down the road. We are now seeing the result of such socialist policies, which have completely destroyed the purchasing power of Venezuela’s money and the whole economy!

So why I’m talking about this, which seems to have very little connection to us, you may wonder? Well, it may sounds utterly impossible, but there is something very troublesome ongoing in the US, which will lead this country toward this unfortunate outcome if not checked effectively. Heard about “Universal Basic Income (UBI)”? Simply put, UBI is aimed for basic income for everyone just because of being alive regardless of anything else. You probably have heard about Utopia: to not have to work so much or so hard; to pass time in leisure rather than labor; to do what one wants rather than what one’s told. Sounds very attractive, right? Just like what had attracted Venezuelans 5-10 years ago, this kind of Utopian scheme will always get ill-informed general people excited and supported before they are facing the ultimate end: total collapse of the whole society! But “That can’t happen here” is just what the Venezuelans thought five years ago. The scary trend I’m seeing is that UBI has started to be promoted aggressively by some politicians here in the US. Bernie Sanders, the DEM president candidate in 2016, has openly said he is a socialist. He and a number of prominent Democrats support a UBI. I think UBI will become a hot political topic in the coming mid-term election as well as the president election in 2 years. Here is the most scary part: UBI will be promoted by the extremist politicians as a panacea for income equity, without much cost to pay. As such, it will probably gain more and more support due to economic ignorance of most of voters. After all, who does not want a free lunch if not costing anything? Eventually UBI may become part of reality in the US. If so, the economic situation will deteriorate quickly and there will be no way back as it will be a political suicide for any politician if he/she wants to get rid of any free lunch already offered. Here you can see a good article about the dangers of UBI.

I may sound too unrealistic and worried for nothing, but just think twice after the young lady in 20s without any political experience (a bartender and waitress) has won a shocking victory against longtime Rep. Joe Crowley in the New York Democratic Party congressional primary just weeks ago. Her ideology?  Medicare for all; Tuition-free public college and trade school; and Universal jobs guarantee. All these sound very beautiful and attractive. The only problem none of her supporters is interested to know is where comes the money to pay for it! Don’t be surprised to see this kind of unthinkable in the weeks ahead during election. This kind of ridicules are easy sells to young people particularly as they don't have much life experience and know very little about economics and they tend to hold the naive ideology that income equity can be easily reached via wealth redistribution (or 劫富济贫-robbing the rich to pay for the poor type of thinking).     

I’m not stupid enough to expect that everyone will agree with what I’m talking here. Actually it is fully expected I will see some strong rebuke from someone who shares and supports the UBI idea. But if you happen to agree with me, then don’t waste your vote to fight against those extremist politicians, for the sake of a more prosperous US future for ourselves as well as our kids and future generations!  Spread out the words to make people more aware of the true nature of UBI and its extreme dangers for our future. It is just like a malignant tumor or cancer, if metastasized, it cannot be cured but will only get us killed! 
If it helps, please share this article with your friends! I hope people will be more informed before they vote!!👊👊
   

Buy when no one wants to buy

I just talked about the marijuana mania when people were chasing high to get into the space and advised not to rush into something just because of being hot. Conversely, I would suggest you to think about something that is perceived deadly risky and no one is interested in it.

Anyone is talking about the Chinese stocks these days? I bet you hardly hear anything positive about it in the past few months. Indeed when the US market has not only fully  recovered from its 10% correction but also made new highs again and again these days, the Chinese stocks have officially entered into the bear market with over 20% downdraft during the same time period. I guess the chilly market performance supports the businessmen’s feeling there that the Chinese economy may not be doing well if the trade conflict with the US is dragging on. So the sentiment for Chinese stocks is definitely extremely low and hardly anyone is interested in them. That’s the exact time my interest level starts to pop up. I think it is a good time to buy China at least for the near term for two reasons:

• After a brutal and relentless 25% crash, the Chinese stock market has reached to its lows not seen in the past two years. So the sentiment is extremely low, qualified for the most hated market title! But technically it is showing a typical bottoming pattern with a momentum quietly moving up, a positive divergence. It is often an early sign of a change of the direction.
• The headline news has nothing positive on the perceived trade war; rather it has even worsened with the recent announcement by the US government that $200 billion more Chinese goods will be taxed. Instead of typical panic selloff we are often seeing on this front, both the US stocks and more importantly the Chinese stocks were going up with the bad news. This kind of counterintuitive stock reaction to bad news is typically seen at the bottom, not at the top.    

I think chance is high that we may see higher stock prices in China in the next couple of months than lower. FXI is relatively safer one to bet for the Chinese stocks. Of course I may be wrong. Even if I’m right, it won’t be a smooth journey to climb up. Expect to see some volatility for the Chinese market!

The posterchild of mania

I just came back from China where I couldn’t access to my Google based blogs. Hence no posting for last week. While in China, I was trying to get some sense about the potential impact from the ongoing trade conflict with the US. Due to very limited time I had, I certainly couldn’t get a comprehensive evaluation of it in any sense but I still got two different viewpoints: not much impact from people representing more general citizens and feeling more worried about the country’s prospects if the “trade war” continuing from those more involved in the business circle like fund managers or businessmen. Apparently, those businessmen have already felt or observed the pain and deterioration in doing business to various degrees. 

Now back to the topic of today. From time to time, we will experience different manias, which will push the underlying asset to bubble then burst. Although our human beings have been evolved and progressed tremendously in all aspects for thousands of years, one thing has never really changed: greedy and chasing hot stuff with herds! Need examples? Just think what happened during the dot.com frenzy in late 90s or housing crazy prior to 2008. More recently we have just witnessed the mini mania for bitcoin when it shot up 10 times within a couple of months, followed by a painful downfall that is still ongoing. But it seems people will never learn the lesson and whenever there is some hot stuff, a period of FOMO (Feel of Missing Out) will ensue. The hottest thing right now is no doubt: marijuana! Well, the marijuana trend is not really new and has actually started for a couple of years. Granted I personally also think this is a megatrend that will turn into a very big market. I especially like its tremendous potential in the medical uses and have talked about it months ago. I have even told you how my beloved stock, Microsoft has moved into this space as well (see here). For savvy investors, you want to get in something that has started its trend but has not attracted much attention yet. For those (including myself) who have done so, they should be happy to buy low when no one was interested in it. It had been a quiet journey till a few days ago when all the sudden it seems a gigantic gold mine has been found and all the people are rushing into it. I don’t know what has really triggered the mania but it came very fast and forcefully, especially for one particular marijuana stock, Tilary Inc (TLRY), a “once tiny” Canadian stock not existent even two months ago as it was just recently IPO’ed in the US Nasdaq. Now first let’s be clear, Tilary appears to be a very legitimate Canadian company specialized in the marijuana business. It is the first marijuana stock listed on a major US exchange and has got good attention when going through its IPO and finished its first day with a price of $22 back on July 19. With just a minor weakness following the IPO, it has basically been in a straight line up for the past two months. The mania came a few days ago when it jumped 50-100% for a couple of days, from about $100 at the beginning of the week to $300 on Wed. Presumably one of the major catalysts for the manic move was the news that Coca Cola (KO) was considering to enter into the marijuana space. Let’s put aside KO for now. With a $300 share price for Tilary, investors valued the company at more than $20 billion for its current sales of just $28 million. In other words, we are talking about a price-to-sales ratio (P/S) of over 700! Do you have any idea what this means? If not, let’s just do some basic comparison. The average P/S for the S&P 500 stocks is just about 2.3. For fundamental analysis, anything beyond 10 for P/S would be considered very expensive and should not be touched. Or if you still don’t quite get the sense how expensive the stock is, let’s put this way. If you buy the stock at $300 per share and let’s say the company will return all the sale revenue back to you as dividend without paying any tax or spending any money on its R&D etc, it will take more than 700 years to make you break even. This is how expensive the stock is. Talking about the insanity with the unbelievable exuberance we are seeing right now in the market for marijuana!  I hope none of you have got the FOMO to buy TLRY now or any marijuana stocks for the moment. It is simply not sustainable when the price move is purely based on emotional euphoria, not supported by the fundamentals. Interestingly, the euphoria for TLRY is fading as fast as it came. In the past two days, it has given back all it gained in the past week and is back down to low $100s today! Honestly I was even thinking to short it but it was too expensive to do so. So I’m just watching the saga unfolding.                         

While I by no means think the marijuana trend has ended already, I won’t be surprised to see more severe corrections for the whole space in the months ahead. If you want to get in, don’t do so simply because it is hot and everyone is buying it. That will usually be the moment when a correction will follow, which could be short-lived or persistent for long time.   

A back home like visit

We have lived in Europe for quite some time and our son has spent his happy childhood in Switzerland. He always considered this little beautiful country as his second home no matter where he eventually settles. So visiting European countries is quite like back home visit for us: regardless where you go, the city setting is often very similar with some local twists of course due to local traditions and culture. No difference this time when we came to visit Helsinki, Stockholm and Tallinn last week. Although we had never come to this part of Europe before, we often had the feeling that we seemed to have come before, especially for Helsinki and Stockholm since Tallinn (Estonia) has more Russian taste, more strange to us. One thing I must say that will never be familiar to us is the language. That’s one major reason why we decided to move to the NA. Since Chinese has no cases at all for nouns, it has already often caused confusion for us when we learned English that has 2 cases. How many times  you have called him as her or vice verse? I won’t be surprised to hear that many friends are still struggling with this in verbal conversations! Then it comes with 4 cases for German and my head started to spill when I tried to learn some German while being in Switzerland. I finally gave up as I knew I would never learn proper German. Fortunately we kept sending our son to the Saturday German school in Canada and more fortunately he has a great talent for languages and therefore he can speak nearly perfect German even without spending a day in any formal German school. For that, he has even got a formal certificate from the German government, verifying that he has mastered sufficient German equivalent to the high school diploma. Sorry for the little digression. What I just learnt from this trip is that Finnish language (including Estonian) has 14 cases for their nouns. Yes, not a few but 14!! My head was almost spun off when I heard it and I cannot really figure out how human beings can even speak such a complicated language without making any mistakes?

Anyway, this is not something I need to worry about as I was not going there to learn Finnish! What I can tell you is that we thoroughly enjoyed the trip with many breathtaking views and beauties. Let me show you a few photos about these cities.

Stockholm has being more influenced by the US I guess and you can feel the US almost everywhere. Even English is almost like a daily language there as everyone can speak very good English. The city has been divided to different parts by salty ocean rivers and I especially like its night views by the river bank.

 

 

 

 

 

 

 

 

Similarly for Helsinki,  the American influence is everywhere and you can see all kinds of American brands flashing on the streets. Tourism-wise, I’m less impressed by Helsinki, compared to Stockholm.

 

 

 

 

 

Now, I talk about Tallinn last but actually it is really a city everyone should go to visit due to its truly breathtaking and strikingly picturesque view of the city, more precisely the old town of Tallinn! I have visited many cities around the world but this one is probably the most beautiful one in the sense that it has preserved its historical architecture and structure so well that I don’t think any other old town can compete with it. And it is also so beautifully built and maintained and the best part for tourists is probably that all the sightseeing worth visiting is confined within a relatively small area within walking distance. It probably has many world No.1 spots with historical values but one interesting spot is the world oldest pharmacy with over 1000 years that is still opening for business. My words are just too pallid and anemic to describe the astonishing beauty of Tallinn and let me just show you some pictures below for you to get a sense. Believe or not, Estonia is also the leading country in digitalization and its government has already digitalized for their daily work.  

 

 

 

 

 

 

 

 

I’d highly recommend everyone to visit Tallinn if possible. I’m pretty sure you won’t be disappointed!! Since we visited 3 cities in three countries and cross sea straits within a week, it was not practical to rent a car to go around. One thing I think worth recommending is to go with Hop-on/Hop-off bus tour for sightseeing. The beauty of it is that one ticket you buy can take you to all the major sightseeing spots for the area and with audio guide on the bus (and Chinese is one of many languages they offer now). And you can get on or off at any spot as you like with no time limit typically within 24 hours or 48 hours. So we usually take the bus to go around first through all the spots to get an idea where are the most interesting places we want to visit and then target those with more in-depth visit. The brand is called City Sightseeing and it is  a Spain company (you can see more here).  I wish it was a publicly traded company as I feel it could be a very good stock to buy. So from the investment perspective related to tourism, I think you can consider the famous company, Expedia (EXPE). I would think almost everyone has used its services one way or the other and its business is booming. While I like Expedia very much, it is quite expensive to buy for long term. However, savvy traders may consider Expedia as a seasonal stock to trade. It may be too late for this year but historically it has a very consistent pattern that the stock should be doing well during the summer/autumn period when tourism is most active everywhere in the world. Keep this in mind for next year although Expedia may still have a few good weeks to go this year.

A lucky trade I should not have done

The market is very resilient and refuses to go down much. I’m certainly very impressed by the market God’s determination to float around this level. As I said, September is one of the worst months for the market in general and volatility is poised to go up with any headline risks. So personally I’ll be very cautious to trade for the long side except for some beaten down stocks with technical signs of strength. For example, I traded on the long side for Sales Force (CRM) following its disappointed earnings when it refused to go down much with bad information. It is a technical strength for it. I also did one long side trade for Broadcom (AVGO) yesterday and luckily I got a great overnight profit but honestly, I wish I hadn’t done this one due to the enormous risk involved which I didn’t realize before I got in.

AVGO has been in a downward trend since late last year and it got killed in the past 2 months due to some concerns related to the ongoing conflicts with China. However, technically it has shown some good bottoming sign and at least for the near term I was betting it should be doing well. So I made an open order a week ago to sell its Sep 07 puts for $210 when it was trading around $225, as I figured I could get in this trade if the market did sell hard this week as I was expecting. Well, I got it yesterday on Thu when the market initially sold hard and AVGO dropped towards $210ish. It immediately bounced back a bit but what got me nervous was to realize that AVGO would report earnings after closing yesterday. My oversight that I didn’t check its earnings date and since my position was not small, the risk was quite high if it tanked following the earnings. Fortunately the technical signal didn’t cheap me and AVGO responded very well following the earnings by jumping up nearly 10%. And my overnight put selling has got a full profit today.

While I’m happy for my luck today, I don’t think it is worth the risk I was taking for such a trade. Of course, I don’t mean one cannot trade earnings but you better to be better understanding what kind of risks involved and with appropriate position size and risk hedging in place to avoid uninformed downside risk. Traders could be lucky for all the previous trades made but often one or two bad trades could wipe out all the previous gains or even get killed accidently in the market. So better to be safe than sorry in this very volatile market!

Mission accomplished?

I was travelling last week and got this brief message:


"@深山老林 上次你说大盘要掉, 为什么还拼命往上涨?" (in English: why the market is going up like craze when you said it is going to decline?)


And my brief response on the road:

"I could be wrong of course but I still think the risk to the downside is greater now than a week ago. It could just be a bull trap that can easily wipe out weeks gain overnight. We have seen many times in the past few months but again I could be wrong"


If you still remember what I was talking about in the past few months, you should know that I have been talking about an uptrend and recovery for the market since early April. Here is what I said back then: "But now I actually think the market may have reached its bottom for this two months long correction and moving forward, it may start its uptrend as the major direction for the rest of the year........However, it is important that there is no such thing as a straight line up. The volatility will still be high and we may still see scary panic selloffs during the course. Panic selling at lows or chasing highs are both losing games in this market. Be disciplined and be patient! "  So there are two points I was talking about back then: the market should be moving up as a major direction but may also involve panic selling from time to time.  


I don't want to be surge coding about my bad timing for the most recent call for a potential strong selloff.  While it is no surprise at all for me to see the new highs as I have been talking about it for many times in the past few months, I indeed was expecting another strong selloff before the new highs. So I was wrong of course about my timing. This is part of the pitfalls for TA as it is not a rocket science to allow for calculating for an exact timing. Rather it is an art with a lot of moving parts involved. Although the market seems to have accomplished its mission for new highs, I'm still thinking we are going to see some strong selloff that may potentially wipe out all the gains in the past few weeks. Actually each inch higher is potentially just adding more severity for the magnitude of the downside risk. This is how I'm seeing the current market and I maintain my point of view. I'd still advise you not to chase the market as the market has the habit to punish most people the most, especially when there seems no risk at all. 


As I have told my friends, one can still make money by not chasing the general market. One easy area for me two weeks ago was the oil sector, which was brutally sold off but was poised for a bounce prior to the Labor Day. So I bet long with the leveraged ETF, UCO, before I went to travel. Luckily it was a good timing call and the crude oil was up for about 10% within the past week or so and my UCO went up even more of course. Since oil will typically be sold off post the Labor Day per its historical pattern, I took my short term profit while ending my travel. 


Enjoy your Labor Day holiday friends! It will be interesting to see how the market will behavior in September. Personally I feel more bearish than bullish as of now, betting for more volatility in the coming weeks, but importantly I could be wrong for sure!   

A recession proof business

You may have heard that S&P has broken a record that it has reached the longest bull run milestone last week (Aug 29 to be exact). It is indeed an amazing record that the market has gone up nonstop in the past 9.5 years. Very likely it will be over 10 years as I think this bull market still has some up leg to run. Having said that, don’t expect we will see another 10 years to go or even 5 years. As I have said many times now, I think a major bear market is very likely to hit us in a way making the last 2008/09 recession like a beach walking. I think the chance is very high that this may occur within the next 5 years, probably much sooner. So while we should still enjoy the last melt-up phase of this bull run as much as possible in the next 1-2 years and we will likely see many new highs in the course, just don’t be too complacent thinking that we will continue the uptrend for 5-10 years more.

Naturally it will be interesting to many folks what to do for a long lasting recession if it indeed materializes. Towards this end, I have been asked and will be more talking about stocks that could be recession proof to the extent that you can safely hold without fear in any economic cycles. But don’t be confused about recession-proof vs price fluctuation. When the market is indeed very devastating, virtually no stocks will be immune to price decline. But recession-proof stocks are usually those that you don’t need to worry that their business will be permanently damaged and their dividends are extremely safe to continue. Personally I’m even more interested in those with a long track record of increasing dividends regardless of the market conditions. Even if their share prices may go down, usually they fair much better than the market in general, i.e. declining much less than general stocks. Just check what MCD and WMT were doing during last financial crisis in 2008/2009. They were the only few stocks that actually were going up when most of others were tanking by 20-50% or even more. So don’t just judge stocks by their share prices. Actually lower share prices will be more beneficial to you for long term dividend reinvestment with recession-proof stocks.

Last week, I shared my thought about farmland and IR twoweeks ago. Other more recent recommended ones that could fall into this recession-proof category could be TGT (see here) and LOW (see here), both of which were sold hard due to some temporary setback or fear of Amazon intrusion but have fought back strongly lately with new highs in the work. If you want more, then you may consider this house name stock, McCormick (MKC). I don’t have time to too much in details but this is really the top brand for Americans when coming to shop for spices. The widely recognized brands besides its namesake spices include Old Bay, Lawry's, and Schwartz. They are so popular that there is no need to do much marketing actually. And people will still go to buy them even if the whole economy slips into a recession since their products are part of basic necessity for many people’s daily life. Talking about the recession-proof! Fundamentally MKC is a cash machine as it generates tons of free cash flow and has grown its revenues 28 out of the past 30 years. That’s why it can afford to increase its annual dividend payment every year for 31 consecutive years. While I think the chance is high that we will go into a prolonged recession in the next 5-10 years, holding MKC with DRIP can make you sleep well at night as you know it is extremely safe regardless how the market is doing and lower share prices will be even doing better for you by reinvesting its dividends.