It was the Thanksgiving massacre in the equity markets – due to the new variant that has emerged out of South Africa.
Wednesday before Thanksgiving was a rough day with major indices down significantly – as investors began re-positioning for covid19 RESURGENCE – rather than REOPENING OF THE ECONOMY.
I am sure there were many investors who bought the dip because the index sold off – if you have cash on the sideline and there are people puking out their stocks, why not buy some?
While it may be tempting, one must consider the opportunity cost – the cash or capital that you are deploying today, is the cash that you may be able to deploy at a later time at a much more depressed valuation – which will obviously lead to a better return!
For the capital that is already deployed in the market, there is not much you can do, but re-underwrite the thesis and hope that you stay solvent through this turbulence (THIS IS WHY YOU MUST HAVE YOUR PORTFOLIO CAPITAL STRUCTURE TO BE SUSTAINABLE THROUGH CYCLES – I BARELY HAVE ANY LEVERAGE IN THIS MARKET SO THAT I DON’T HAVE TO PUKE).
For fresh capital, you can think one more time – it is all about opportunity cost. For me, I am tempted to stay on the sidelines in terms of putting that capital into the stock market and deploy that capital in absolute real assets like Rolex watches that I think could PRINT for me due to inflation and even tighter supply due to shutdowns from the new variant.
Here are a few reasons why I think equity market risk premium should be higher-
1. Institutional capital invested into equity market is DEEPLY LEVERAGED.
Hedge funds generally take on relatively high leverage. However, apparently we now have LPs that are leveraging their capital when they allocate money to GPs. this is a chain leverage.
2. Seasonally, this is not a time where institutional investors are willing to buy stocks / provide liquidity to panic sellers and sell at a higher price.
It is the year-end! Institutional investors are paid on how much return they generated between January 1st and December 31st. If you buy today (end of November), there is only one month for the stock to move above your purchase price. If it is March, it feels like 9 months are a good amount of time to various catalysts to play out. In December, not a lot… if the stock keeps going down, you just cost your bonus for the year.
3. Lack of liquidity means liquidity premium is high!
Fairly self-explanatory – December is slow time. It is the holidays and many families are traveling. When people are puking their stocks, there is not a lot of buyer- so sellers have to sell their stocks at a much lower price- which begets even greater liquidity premium. Bad decision to buy could lead to significant paper loss because one holder just decided to sell or get out of position.
4. HFs are having a tough year – some HF blow-ups can be very bad
Bad return means some teams will get cut – teams get cut usually around the year end. This year has been much worse – so there could be even more blow-ups- more forced sellers. More forced selling begets more forced selling and that begets more portfolios blowing up as their trades move against them (many hedge funds have correlated positions).
ABOVE FOUR THINGS really mean that the increasing LONG exposure to equity market has negative risk-reward.
In the meantime, I plan to devote more of time to things that I can control – reading more, meeting more companies, working out more. Making myself more valuable – markets move up and down, but I need to keep improving INTRINSIC VALUE of myself.
HAPPY INVESTING!
*Not investment advice
