How To Handle Stock Market Volatility by Ben Strubel, Strubel Investment Management
One of the reasons Bernie Madoff’s Ponzi scheme was so successful is because he provided steady returns. Investments with Bernie always went up. The amount varied but the direction was always up. Of course his returns were made up. So are the returns of every other scheme that promises steady returns. If you are making more than say the yield on the US 10 Year Treasury Note, about 2% per year, you’re taking some risk somewhere.
The risk and the volatility inherent in the stock market is the reason why investors make money. You are essentially being “paid” extra to take risk and put up with the ups and downs. And there are lots of downs. Since the S&P 500 index was created in 1957 almost 47% of the days it’s closed down. Yes, that’s right, despite stocks being a huge money maker over time the markets fall almost half of the days! In return for putting up with all the noise and volatility over the long run you make handsome returns. Depending on the dataset you use the long term returns for the stock market have averaged 10% to 11% per year.
GrizzlyRock Value Partners was up 34.54% net for 2021. The fund marked 10 years since its inception with a 198% net return, resulting in an annual return of 11.5%. GrizzlyRock enjoyed 14.8% long alpha against the S&P 500 and 26.9% against the Russell 2000. Q4 2021 hedge fund letters, conferences and more The fund's short Read More
If you are invested in stocks they will go down at some point, and by a lot. Even during a bull market it’s common to see drops of 5%, 10%, 15% and sometimes even 20%.
Here’s an example. Since the lowest depths of the crisis in 2009 the S&P 500 has gained approximately 150%. Here is a list of things that have happened during that time (in no particular order).
- Civil war in Libya
- The Eurozone almost collapsed in 2011
- We had the “flash crash” in the stock market
- A brutal and ongoing civil war in Syria
- We had three Quantitative Easing (QE) programs start and end
- The tsunami in Japan
- The rise of ISIS and a new pseudo war in the middle east
- The Federal Reserve unable to make up its mind when it’s going to raise rates
- Another Greece debt crisis
- A financial crisis in Cyprus
- Standard & Poors downgraded the US debt
- Yet another Greece debt crisis
- The debt ceiling standoff and the shutdown of the US government
Anyone who got scared during any of those events and moved their money into cash or bonds lost out on making a significant amount of money. In fact, there have been numerous studies that show that investors cost themselves around 4% per year on average by trying to time the market or panicking and getting out at the wrong moment.
Of course that’s easier said than done. I have quite a few clients who have come to me after being with a previous advisor who was terrible. The previous advisors did dumb stuff like putting a huge chunk of a retired client’s portfolio in tech stocks during the tech bubble, putting clients in penny stocks that eventually went to zero, encouraging risk adverse clients to invest in aggressive stock portfolios, and more. These clients lost big chunks of money in the past. So naturally these clients and others who may have experienced something similar are left wondering if the current events will just be another bullet point on the list above and nothing to worry about or will it be like the times when they actually lost a lot of money.
Well let’s put things in perspective. Only about 2% of revenues for companies in the S&P 500 come from China. The US is still the main driver. The US unemployment rate is down to 5.5%. Oil prices continue to fall and the lower they go and the longer they stay low the more money consumers will have. The CEO of Dow has repeatedly said that low oil prices are a net benefit to his company and to consumers. Low gasoline prices could be the thing that finally helps the economy on Main St. get going! Corporate profits for the S&P 500 outside of energy are expected to rise around 5% this year. After years of no growth we are starting to see wages for workers rise a little bit. Does any of this seem like a recession is around the corner to you? It’s more of the same with some upside for consumer spending because of low oil and gas prices.
The current panic over the Chinese stock market is going to be one more thing added to the list above of things that happened while the stock market went up over the long term.
Amidst all this volatility we took the opportunity to make some changes to the portfolio. We sold our position in Outerwall because we believed we found a better investment opportunity with similar upside but less risk. That investment is Rolls Royce the British jet engine manufacturer. The jet engine business is very lucrative with high barriers to entry and jet engine companies making most of their money off long term service contracts. Unfortunately operational and management issues at Rolls Royce have hindered the company and the stock. Rolls Royce is only about half as profitable as its main competitor GE Aviation. Lucky for us an activist investor has stepped in and essentially kicked out the old CEO. With the recent market volatility we were able to purchase shares at close to the same price as the hedgefund. Rolls Royce offers great upside but with less risk to its underlying business model than Outerwall.
In our dividend portfolio we sold our position in BAE Systems (BAESY) because of a better opportunity. The recent media stock meltdown has made shares of Viacom extremely cheap and the dividend yields of the two companies were roughly comparable so we decided to make the switch and purchase Viacom which we believe has much more long term potential upside than BAE Systems. We also bought Twenty-First Century Fox for our other stock portfolio after it fell substantially. You can read some of our investment case for Fox pertaining to its ownership of Hulu in an article we published here.
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The performance data presented prior to 2011:
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- Reflect the reinvestment of capital gains and dividends.
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