Invest As If We're In The 5th Inning
How's the quality of your relief pitching?
This past Monday, November 14, I offered a somewhat unusual mid-quarter portfolio update.
Related to that, and before I go any further, one minor bit of errata. In the screen shot I posted in the previous article, I mistakenly left the heading in the 3rd column from the right as “11/11 amount.” This looked very confusing, as the starting point of the comparison was 11/11. The comparison should have been to the quarter ending 9/30, of course. So, for clarity, below is an updated picture.
As I shared in the update, the reason I decided to provide the update is that I undertook, for me, a fairly large cash raise. In the graphic above, it can quickly be seen that, overall, I increased my cash level by 10.04%, and an even greater 14.76% in my “real” or current investment account, the first funds in sequence that I will be using to fund my day-to-day retirement expenses.
In the update, I shared that I planned to write an article for Seeking Alpha which would explain in full the rationale for my decision. Here’s a link to that article, We’re In The 5th Inning - That’s Why I Hold Almost 25% Cash.
For my Substack readers, I will next provide an extremely brief synopsis of that article, as well as sharing some GTC limit buy orders that I currently have set in my portfolio, hoping to deploy some of the cash I raised at lower prices.
Why I Used The “5th Inning” Metaphor
In baseball, barring a tie, the game lasts 9 innings. As such, the 5th inning represents approximately the midpoint of the game. At that time, there is so much about the outcome that is unknown. For example, even if one team has a lead, the quality of its relief pitching may be poor. As a result, the remaining 4 innings may prove to be a real adventure.
Before making the decision to raise the amount of cash I did, I spent a fair amount of time reading current outlooks from investment professionals whom I respect. And the conclusion I personally came to is that the market may have gotten a little ahead of itself.
In short, here are the 5 reasons I enumerated in the article.
Current market declines mainly reflect declining interest rates - A year ago, risk assets such as equities were competing against zero return from cash. Currently, risk-free return is roughly in the 3% range. This factor implies that there could well be more downside to come, due to the factors listed next.
Due to recent and continuing geopolitical turmoil, we have moved from globalization to de-globalization - In the Seeking Alpha article, I specifically cited Russia and China as two examples of how this is playing out.
Declining corporate profit margins - So far, corporate earnings have been surprisingly robust. However, it is not at all clear that this can continue to be the case. Almost all analysis I have read posits that we are facing at least some level of recession. Almost certainly, this will be accompanied by a decline in corporate profits.
Housing Prices - In short, a combination of rising home prices as well as mortgage rates leave us with a tremendous rise in unaffordability. All the way back in May, I featured a note from Zoltan Pozsar explaining why he believed a significant drop in prices would actually be desirable, from the standpoint of the Fed.
Wild Cards - By this, I refer to things such as the recent developments at FTX, which some industry insiders have said triggered a "Lehman moment," referring to the 2008 collapse of the investment bank that sent shockwaves around the world.
If you are interested in the further detail I used to support those 5 factors, you will find it in the Seeking Alpha article.
My Current GTC Limit Buy Orders
If my outlook shared above comes to pass, I hope to preserve a measure of capital and reinvest it at lower prices. Using ITOT and IXUS as proxies for the total-U.S. and foreign markets, here are the good-till-canceled limit buy orders I currently have entered.
I started with the November 10 closing prices for the S&P 500 index, ITOT, and IXUS. I next decided that I did not want to make any moves unless the index dropped by at least 5%, or about the 3,758 level. At that point, should it occur, I would execute fairly small buys.
From there, as can be seen, I set further targets at 2% increments; representing market declines of 7, 9, 11, and 13%, respectively. At each level, I will buy 1.5x the number of shares of the previous purchase. As a result, should the market fall to approximately the 3,450 level, my last purchase would be 5x the shares of my first purchase.
If you’re curious what the average share price would be if all orders execute, given this structure, it would be 78.58 for ITOT and 51.03 for IXUS, or roughly 11% below the price at which I sold and raised cash.
The end point, roughly in the 3,400-3,500 range on the S&P, lines up nicely with a point I have targeted for some time (see Summary and Conclusion section of this article).
I’ll leave things there for now. I hope this gives you something to think about over the weekend.
As always, I am honored that you have chosen to read my work. I would be even more honored if you would share it with others among your circle of family & friends who might benefit.