This month I pondered a fair bit of what impact the newly elected Mad King could have on stock prices and more specifically the operating business environment. Well just as he signalled, a he rushed out a whole bunch of things he said he was going to do and were not really good to a conducive, stable business environment. It started with his inauguration speech which pretty much signalled the US is going inward and protectionist. Trade wars are looking inevitable and history has shown that nobody benefits from it. At the end it leads to a lower quality of life, a lower standard of living, and greater misallocation of capital which in the long term is not good for stock prices. This notion has forced me to make some tough investment decisions this month.
This tone has now made pondering issues like when or if interest rates will go up less relevant. We may be embarking on a game changer period. With that I am starting to review my positions to see if they could hold water in a potentially rough investing environment. Readers of my blog the past few years know I’ve been pretty down on the US stock market as a whole because of the low interest rate policy has created great distortions in valuation and price discovery. This narrative is still out there, however its oxygen is getting sucked out by the Mad King.
Opened position in iShares Gold ETF (CGL)
As you've seen in my mind maps the big debate is if the Mad King adopts protectionist policies it is likely to create inflation and will this be more damaging than any impending interest rate hikes. Higher inflation could put pressure on the US$ and given that my portfolio holds a fair amount of US stocks, it could erode its value. If the US$ falls I need some kind of hedge to preserve the value and this is where gold comes in. Any gains in gold would offset any losses in value of the stocks as a result of currency depreciation. To do this I opened a position in iShares Gold ETF which gives me this gold exposure, without having to own physical gold. If I decide to pull out of US stocks meaningfully, then this becomes less relevant and I may reduce or eliminate this position.
Opened and Sold position in Horizon betapro S&P500 Vix Index ETF (Ticker: HUV )
VIX was one of the worst performing indexes in 2016. I’m always looking for assets that are priced in the dumpers as they often can represent low hanging fruit andfuture investment opportunities. I found an ETF that invested in the value of the VIX and I decided to open tiny speculative position. Factoring in the Trump impact on stock prices via tweets. I was thinking there had to be some upside on this, as there could be some volatility. I don't normally go into these type of derivative investments so this is a bit out of my comfort zone.
In its nature the prices swings are very violent. So much that I was down 15 percent on the position. I think ultimately it will go up but I just don’t know when. I think the best time to get into something like this is when you really get into a period of market disruption. I’m thinking I may be to early to this party so I decided to sell and take the small loss now instead of letting it fester and making it more difficult to recover. My normal buy and hold investment ideology, would not be conducive to this type of security. Lesson learned.
Sold position in Tyson Food (Ticker: TSN) for 6.4 percent gain
I wasn’t looking to sell Tyson Foods but a report over the weekend there was a warning of a new strain of bird flu that could threaten the US and more specifically the poultry industry. To me that represented a negative game changer moment and so I decided that to bank the little profit I had. I like Tyson Foods and it has been one of those reliable go-to stocks in the past for me, however these types of risks, which are well known, can take the stock down pretty seriously so I’d rather sell now and let the dust clear before going back in.
Sold position in Under Armour (Ticker: UAA) for 37 percent loss
This one hurt. The stock got killed on the last day of the month as it reported much weaker revenue growth and even posted operating losses which is unheard. The stock bull rushed through my 20 percent loss threshold that I have for every stock, so I had no choice but to suck it up. I still like the business, but the math is saying take your medicine and come back another day. It has a greater reach internationally. Unfortunately there are new risks, mainly the Mad King. If the Mad King goes ahead and picks trade fights with everyone, US companies like UA which rely on cheap manufacturing and sales to other countries are going to get hurt.
January was a tough month as I was forced to take some losses in a couple of positions. The key here is I didn't let it fester. I had exit points set up when I bought them so when they crossed them, the decision was easy. It's a critical skill to have in investing. As much as we are focussed on generating gains, it is just as critical to learn how to manage losses because we don't want Loss Aversion to set in and make things worse. We may be entering a period where serious price fluctuations may take place and may force us to make hard decisions.