Stock Talk School: Fear-Based Investment Management

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Chris: This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group with the January 18th edition of Keeping you Connected to your Money. Each week, we try to recap the week’s events, we try to educate you a little bit about our thought process, what’s going on in the markets, and try to give you a little bit of what we’re thinking about is going to happen in the weeks and months ahead.

I want to title this week’s piece, Fear-Based Investment Management. What that is, is it’s basically those managers that are out there that will claim, “I’ll get you out, I’ll protect your money.” I’ve been managing money for 25 years. I’ve ran a $30 billion plus mutual fund. Ran the number one fund in the country twice. I run the number two mutual fund in the country over five and a half year period in the crash of 2008 or a hedge fund that was down 3% when the market was down 55%.

Almost every single one of these systems I found is trend following and based on volatility, and I have never found one that works. I definitely never found one that works if the manager is going to charge you 1% management fee. These are systems that are lagging. They tend to actually sell stocks when they’re down and buy stocks when they’re up and they do not work for long-term investing. They’re marketing systems more than they are investment systems.

If I could focus first on planning and setting your asset allocation, you would not have to worry about what the stock part of your portfolio was doing. That’s what we do here at Oak Harvest, we focus on planning first. We focus first on your goals and objectives, what’s your expected rate of return that you need in retirement or need during the accumulation phase. We look at that and then we set the asset allocation based on our core four asset strategies, those strategies being safety, our cash substitutes, bond substitutes, annuities. Those are all safety asset instruments, real estate investing, which is another asset category, and then equity growth assets and equity income assets.

Those are the four core strategies we use, and then we use tools amongst them to get those strategies implemented. We do have crystal ball indicators here at Oak Harvest, but none of them are exact and none of them are precise. We’ve talked about those indicators in the past. The three Goldilocks indicators with regards to the stock market, being the dollar, oil, and long-term bond prices.

We’ve talked about the volatility measures that we look at, which are really pricing for the market and how a lot of times those indicators will flash buy signals because the cost of buying insurance for a day is so dramatically higher than it is insuring something for six weeks or six months for that matter. These indicators are not perfect, they’re not precise on either levels or timing. You have to be willing to use them only occasionally and they aren’t predictable over short periods of time.

When we get a new client, we look at implementing an investment strategy, whether it’s new or whether it’s changing their allocation. We try to do it over about a six-month period because that time period gives us generally a window of taking advantage of higher volatility and cheaper prices. We hate having to be told that we have to get the money invested the next day because most of the time that’s not the appropriate strategy. That’s not going to land the appropriate outcome for the client.

I want to reiterate what our outlook is for 2019. It’s going to look a lot like 2016 did. At the beginning of 2016, the Federal Reserve paused interest rate increases and China started stimulating their economy dramatically. The stock market had fallen in the fourth quarter of 2015 and the beginning of 2016, over 15% as the Federal Reserve started to talk about pausing their interest rates increase, the market rallied dramatically for two months.

It’s doing the exact same thing this year. We’ve gone from on December 14th, the market was around 2,650. On Christmas Eve, it went as low as 2,350, and then the Federal Reserve came out and said, “Maybe we’re tightening credit too quickly, we’re going to slow things down.” It is now January 18th and the market is right back to– actually, it’s higher than where it was on December 14th. I think the market as of today is 2,675. A lot of volatility in four weeks and we’ve gotten nowhere. If you had not looked at your portfolio in the last month, you would think nothing really happened in December.

We think that the Federal Reserve pauses. We think that we actually get a China deal done. If we do and people start to feel a little greedy and a little better about the economy, the market can go all the way back to 2,800 pretty quickly. We were there on December 4th. Then we would imagine that the second quarter that we’ll have a lot of backfill on the market as people exhale and look at our stocks a good value at 2,800 or is the economy slowing too much or there’s going to be more concerns about the Federal Reserve raising rates.

We’re expecting a very good second half to the year in the stock market. We do not expect a recession this year. Don’t expect a recession in 2020. We think the president probably wants to try to get reelected. He’s going to focus the second half of the year on domestic policies, probably puts out a lot of feelers there on an infrastructure spending plan. I know that the Democratic party wants to put some projects in place to rebuild roads and bridges.

We talked a couple of weeks ago about some groups that we were going to be looking at investing in. We’ve been buying some cyclical stocks lately, names like Caterpillar and Deere that benefit from international markets, benefit from a lot of construction. We think those markets will pick up in the second half. We were buyers of emerging markets. Albeit a little too early in the third quarter of last year, but believe it or not, the emerging market group is the best performing group year to date. It’s actually outperforming the S&P 500 since July 4th of last year, which most people would not believe.

We also like the semiconductor market Texas Instruments, Applied Materials. These companies have had dramatic valuation compression as people are concerned about the amount of phones that were being sold this year through Apple in the second half of the year. We think that what happens is a lot of the inventory that people are concerned about, gets burned off in the first half of this year, and then the new build for new phones and new fabs for semi’s starts later this year.

There’s going to have to be a whole big upgrade cycle of your phone and telecom equipment for what’s considered 5G, fifth-generation speeds. The ability to stream more video, more audio faster to your phone or any other device, that’s coming. The build will start in earnest later this year and stocks will actually start to anticipate all those orders.

Those are some areas that we’ve been actually investing in. Bought some financials for the first time in nine months in front of earnings about a week ago, and think that that will be a big group probably in the third and fourth quarter of this year. Won’t do much the first half, but we don’t own very much at all and decided to finally start to buy some when other people were singing about how bad business was. We thought the valuations were attractive.

Once again, this is Chris Perras with Oak Harvest: Keeping you Connected to your Money. Remember that the best advice we can give you in retirement is try to just stay on your plan. Occasionally, markets will change. We will make changes for you. We actually were looking to stocks in December when other people were selling. If things turn around in the economy and the market continues this bull market and is significantly higher in the second half of this year, beginning of 2020, we’ll probably be pulling back on our equity allocation at that point. For now, we think the bull market is intact.

The bull market is a boring economy, 2% growth, 3% growth, Federal Reserve on hold, and it’s not sexy. It’s not the internet bubble, it’s not Bitcoin, it’s not those kinds of manias. You want slow stable growth where companies are still a little concerned about expanding at a fast rate. They’re very cautious about how much money they spend on CAPEX, but they are spending money. Once again, Chris Perras, with the January 18th, keeping you connected to your money. Many blessings.

Speaker 1: The content contained within this Oak Harvest podcast is for informational purposes only, and is based upon information current as of the time of recording. It should not be considered an offer or solicitation to buy or sell securities, nor is it tax or legal advice. Investments involve risk. Unless otherwise stated, particular investment returns are not guaranteed.