December 7, 2020
Mesa, AZ
Investors,
They say, “Time flies when you’re having fun!”
2020 flew by… the implications are preposterous.
Who had fun this year?
Well, I guess we did…
With 18 trading days left in the year, I could not be happier with how we have performed, so far. I admit that anything can happen in 18 days – look no further than earlier this year for evidence.
The Income Strategy has achieved its goal and is up about half as much as the market, while being down less than half as much as the market back in March, at the lows.
The Appreciation Strategy has had an amazing year. There is no other way to put it. Back in February when the market peaked the Appreciation Strategy was beating the index by more than 4%. Then, when the market was down 30% at its low in March, the Appreciation Strategy was down less than 20%. And now, with the market at its peak again, the Appreciation Strategy is ahead by more than 7% for the year.
We have beat the market on both the upside, and the downside – a testament to our process which is highly disciplined. Our goal with the Appreciation Strategy is to match the market on the upside – so, I am extremely pleased with these results.
Now if we could just get this year in the books!
In all seriousness, 2020 has been one of the most fun of my life. The Fleury Clan has been to Arizona twice, Idaho and Florida. And ever since I turned about 30 years old, I’ve absolutely hated being among large groups of people (unless at a concert… probably the thing I missed most about this summer) so empty theaters for example, are fine by me.
My family went camping more than normal and I played golf more than the past several years – spending time outside under the Colorado bluebird sky, is the best. I even got more days on the mountain than usual before they shut down for last season, too.
I know it hasn’t been the same for everyone, and many out there are hurting financially, and emotionally – from COVID-related losses and potentially the presidential election.
As you all know, I don’t much care who the President is. And as I have said in this commentary consistently for the past several months – the market doesn’t care either. Going all the way back to August 5th, I said:
“Many are focused on the upcoming presidential election in the United States as a market-driving event. I am not. I almost don’t even care.”
I went on to say:
“The market hates uncertainty more than it hates bad news.
The market can handle bad news. Yes, it goes down, but it comes back too. Just look at the bad economic news we have seen recently… More people have lost their jobs in the past few months than ever in the history of the America. How is the market reacting to that bad news?
So, if you happen to see Mr. Biden’s potential election as bad news, perhaps you should rejoice and look forward to that news being final. The market doesn’t care who sits in The White House any more than I do, personally. We (myself and the market) just want to get it over with so we can move on to focusing on matters which are actually relevant to the economy. Once the outcome is certain, I believe the most likely scenario is for the market to rise on average.”
You might argue that the outcome is not yet known…
I can only tell you that the market is completely ignoring Mr. Trump’s legal effort to overturn various state’s results. No matter what, it is a sad thing to watch anyone lose anything with so little class. It reminds me a lot of when I played junior hockey and we would go into a small town and get totally “homered” by the referees who were locals.
By the end of the game, you’d have grown adults fighting one another in the stands and behaving like the “poor sports” they always told us kids not to be. And of course, us kids would fall right into line, whining and complaining about how the refs stole the game.
Nonsense. If we were good enough, the refs wouldn’t have been able to take anything from us. Winners just win, and when they lose, they do so with class – even in a rigged game.
As far as the market is concerned, the outcome of the election is now known. And, frankly, the news isn’t good – but the market doesn’t care about any of that.
I don’t think the Biden administration or any of their policies will be good for the American economy, especially for the poorest Americans. I think that Biden administration policies are going to worsen the income inequality situation, not fix it.
But that doesn’t mean we can’t make money. Quite the contrary.
Politicians are mostly predictable. Policies like progressive taxation, basic universal income, and printing money to purchase bonds have known effects. Those actions all erode purchasing power but increase the value of real assets and capital efficient businesses – and so, the name of the game is to begin accumulating real assets and capital efficient businesses before the government gets too far along with these policies.
The rich get richer. They will again. The poor will get poorer, too. And it will become even harder for the poorest to divorce themselves from their dependence on the government – which I suspect is exactly the plan.
All I know for sure is that if printing money and giving it away made the entire population wealthier or reduced income inequality on average, that would have probably shown up in the real lives of poor people by now…
But none of this is a reason to abandon the stock market or go hide all your money in a coffee can and bury it.
I recently read something from one of my favorite analysts, Steve Sjuggerud which was so utterly brilliant for its simplicity that I must share it with you.
I can also verify that this framework is exactly what we have used to successfully manage client portfolios (including the Appreciation Strategy) for as long as I can remember --- we just never really articulated it this way before.
There are 2 basic questions investors need to answer:
Is the stock market cheap or expensive?
Is the stock market in an uptrend or downtrend?
That is all we concern ourselves with at a macro level.
There are only 2 possible answers to each question – and these answers lead you to 4 quadrants of possible market scenarios:
Cheap and downtrend
Cheap and uptrend
Expensive and downtrend
Expensive and uptrend
What is important about this is that in 3 of the 4 scenarios, the market goes up – it’s just the magnitude that changes. In only 1 of the 4 scenarios does the market go down on average.
See Below:
To take it one step further, Meb Faber, another of my favorite financial thinkers cites John Hussman when stating that the markets spends only about 10% of its time in the “expensive and downtrend” environment.
For what it is worth, this exact same framework can be applied to individual stocks, or sectors. The trend is extremely powerful and often overpowers valuation for extended periods of time.
Also, political parties and elections are mostly irrelevant in this framework which is refreshing!
Ultimately, the most important part of this framework is identifying when the trend has changed. We have technical indicators for that, and our trailing stops are placed where they would only hit if the trend had clearly changed.
Volatility-based trailing stops generally get us out early in a trend change, but never at the exact top. Once we stop out, we have cash to invest in something that is either cheap and/or going up – preferably both.
Rinse. Repeat.
You might be wondering where we are today…
The market overall is expensive and in an uptrend, which is historically the second best out of the four scenarios in which to make money. Most of the stocks we hold are also expensive and going up. We’ve started to find a few cheap stocks in uptrends, and we are adding those where we can find them, especially in the Income Strategy.
How could I sign off without calling attention to a few of the calls I have made in recent letters?
To those of you who followed my advice and bought some bitcoin, congratulations!
Last month I said:
“…one of the best hedges against inflation is bitcoin. [A month ago], bitcoin closed at $11,374.01. Today it trades for around $14,895… Up 30% in 30 days.
If you don’t own some bitcoin, you should.
ALL of you.*
There are basically no excuses for not having at least a little. If you need help buying some, let me know. I won’t be compensated in any way.”
Well, bitcoin trades for around $19,000 as of this writing. That means it is up another 27.5% in the past 30 days.
If you told yourself “I missed it.” upon reading the November 5th note, you just found out why that is one of the most dangerous phrases in all of finance. Right up there with, “this time it’s different.”
And while it won’t go straight up every month, it still isn’t too late to start accumulating bitcoin.
Aside from bitcoin, I mentioned TTD as a personal favorite on October 5th, I said:
“Which companies are positioned best for the upcoming “online only” holiday season? I have a few in mind.
The obvious choices are Amazon (AMZN), MercadoLibre (MELI) and probably my personal favorite, The Trade Desk (TTD).
TTD is in the online advertising business. They sell advertising space to the highest bidder using your internet cookies to tell the bidders who you are, driving the price of the ad space much higher that it would otherwise be.
With all those eyeballs being driven online, from in-store, TTD stands to benefit in a huge way as advertisers pay up for access to the shoppers most likely to click ‘buy.’”
Since October 5th, TTD is up 58% (from $573 to a recent high of $915). We started buying (in Appreciation) back on March 23rd, 2020 – when it closed at $199.69 – and was already terribly expensive… obviously it was at the beginning of an uptrend.
As always, thank you for reading!
*Bitcoin is extremely volatile and could go to zero in an instant. That said, you can literally buy $1 worth, via Coinbase. So, the appropriate amount of exposure is different for everyone. Typically, we recommend our clients have about as much bitcoin as they would invest in a very aggressive stock with no earnings or trading history.
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisor
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