You need to anticipate the negatives. Right now, when we are on the cusp of a decline that will bring out talk about how we are about to re-test, you can still trim if you haven't, in order to get ready to do some buying.
Yes, I still favor selling. There's just too much uncertainty and I think that the 30 million unemployed was a game-changer, the second game-changer this year after Covid-19 itself. There are a host of companies that do absolutely abysmal in a recession and you simply can't be in them, even if we open things up because we are doing so with one hand tied behind our back: social distancing.
If you are older, as I am, and you are still walking around with something like 80% or 70% S&P Index fund, I would say that's just too much risk. We know most people are in index funds now. On Saturday, Warren Buffet was questioned about whether indexing has reached a peak and has overstayed its welcome.
Buffett defaulted to how much better an index fund is to one that charges fees. I get that. But he didn't address what I thought the core of the question was: do index funds own too many of the wrong stocks for a recession/pandemic? Buffett did not truly address the latter and my judgment is you now must scrutinize the index because it was built without a pandemic in mind.
Even as we have been raising money and raising money and raising money and are incredibly defensive for my charitable trust, we are still telling club members of Action Alerts Plus that we think you should continue to sell, because the pandemic's not going away and can play havoc with many stocks that seem otherwise safe. Remember, the keepers of the index regularly take out the stocks of companies that are doing poorly. It's more active than most think. Right now, there are scores of stocks of companies that many not exist in the index.
If I am so negative then why not go into cash? ? Why not raise a huge amount of money beyond the 20% that I have always viewed as the upper limit?
Simple: Because we don't look like an index fund at all. We think that there are a huge number of stocks that can go higher because their companies can do well in this environment. Remember, we came up with $12 trillion worth of stocks that can do well or even better out of a total of $25 trillion.
The problem is, if you own index funds, you own the other $13 trillion. Many of these stocks were index worthy during even a garden variety recession, but not one of pandemic proportions. In a pandemic that's coupled with a worldwide collapse of trade and a trade war, you have to have a lot of cash and you have to overweight secular winners wherever they may be, even if it means being very long Facebook (FB) , Alphabet (GOOGL) , Amazon (AMZN) and Microsoft (MSFT) as I have long advised club members. These are and have been core holdings for ages because they have great management, can pivot and have fabulous balance sheets. How many S&P 500 names can meet that tri-part test?
For my trust, we keep selling what I call the "wrong" stocks. No matter how fast we try to sell them, we can't sell enough of them. We would have done better to be like Buffett who blew out all of the airlines at once. Piecemeal selling of wrong stocks is a big mistake.
This is the time when owning individual stocks and cash can augment your index holdings. But it's also a time to reassess index funds. Reassessing means selling in the same way we are selling the index fund stocks not built to last through a pandemic. It's not too late to do so.
