How to make money from this crash - Lessons from 2008

[ukvalueinvestment]

I would like to discuss how the most money was made from the depths of the last crisis.  There are different approaches.  eg.

 

"Now is the time to buy quality names as they are on sale"

"Buy the strongest companies is beaten up sectors"

"Buy net/nets trading below cash"

 

Let's please assume that this coronavirus will end in months and that the underlying productivity and demand in the world has not fundamentally changed.  Some things will change.  I think once all this is over a lot more people will have tried food delivery and will have decided they like it (or not).  What are the second/third order effects and what is the sector to buy.  My thoughts:

 

- Sovereign debt crisis as countries are forced to borrow on a massive scale

- This leads to further bid for quality names - "if you made money in two crises you are unbreakable"

- General further shift to online/digital as people who had never previously used online became aware of ease of setting up accounts/payments etc.

- Defined benefit pension plans are further hit by lower discount rates - this could be offset by lower life expectancies and mortalities (unlikely to be material)

- Further shift away from physical entertainment as people realise they like staying in and playing playstation etc.

- Shift away from gyms as people realise they like jogging/their peloton.

 

My current thought on the sectors to buy are:

 

Highest quality airlines as soon as I am convinced they are past raising capital, hopefully in a closed end fund that is trading at a discount.  Demand for air travel will continue rising in long term.

Levered airline industry names that have to recapitalise - eg Sydney Airport, Aercap. 

Levered small cap in a fund that is trading at a discount as soon as it's clear economy is recovering.

Capital allocators like Berkshire, Markel and Exor at point of maximum dislocation and uncertainty.

 

 

 

 

 

 

 

 

 

 

 

 

 

[Uccmal]

If you are assuming 6 months then 2 yr. Leaps on quality names that are on sale, some of which will be converted to shares later.  Not yet though.  Maybe in another 30% down.

 

Do you really want to get caught in a recapitalizing situations?  In 2008/2009 many companies had to recapitalize near their bottoms.  I would think it would be better to keep it simple and buy companies at multi-year discounts that will not need to recap. 

 

As to 2nd and 3rd order effects.  Perhaps, we are finally seeing oil in a demand and supply destruction phase.  I don’t know what the implications are for profitability and price.  Nothing really to do with the virus although it may accelerate this. 

 

Its hard to tease apart:  If fewer people use oil across the world due to home working arrangements, less business travel etc. then you get lower demand.  However, the 2nd or 3rd order effect of this is less supply, and so on. 

 

People have been predicting remote work for 25 years but it never really materializes in a meaningful way.  Something about human nature.  Working from home really sucks for a lot of people.  I have everybody at home right now due to school closures and if my wife and I are still together in 6 months, it will be a miracle.  I cannot get anything done.  In order to do anything I have to get out - sitting in the Home Depot parking lot typing this.  Just bought some ABS pipe for a bathroom build I am doing at home. 

 

In summary, I have no idea how to play this other than buying the very best companies at low prices, and using leaps at some point to juice this (not yet). 

[Castanza]

My view has shifted quickly as prices continue to come down. Cash cows are now at the tops of my list right now. BRK, GOOG, FB, TPL, etc. Airlines once we have more clarity and some of the medical device companies are beginning to look interesting as well.

 

I also don’t understand this (imo) nonsensical argument that everyone will be permanently working from home after this passes. Office space is generally a very small fraction of OPEX for most companies. When this passes, people’s desire to “get out” will look like a champagne bottle blowing it’s top. If we avoid any type of major recession and job/pay loss that sentiment will remain high. Americans specifically are busy individuals.

 

Cabin fever will begin setting in shortly and “Don’t shit where you eat.” will be the new religion a few months after this is over.

 

 

[Xerxes]

I work from home and live in Canada. I don’t like it. Once in a while is ok (once a week) but cannot stand not seeing people.

 

I don’t know Markel  very well. I always thought it of as FFH with a better equity picks. That said I think Blackstone and Brookfield are the names that can go side by side with Berkshire as “picking up the pieces” winner.

 

I actually believe AMZN customer-centered formulae will prove to be winner over merchant-centred Shopify due to what happened. Sure Shopify is expanding its platform to merchants but in a time of crisis AMZN can become like an utility something that Shopify cannot.  I am long term believer of Uber and with $10 B in cash I think they can innovate.

 

As a side note:  US Gov spend trillions of dollars on its nuclear triad and military for defense, and here  we had world greatest economy knocked out by a virus. There is bound to be ramification.

 

Within aerospace sector, i believe in the newly created aero-Defense giant Raytheon Technologies and in time (given what happened b/c corona impact on aerospace industry) market will see the wisdom behind that diversification strategy. 

[wabuffo]

I would like to discuss how the most money was made from the depths of the last crisis.

 

The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is --  buy the trashiest micro-caps you can and buy a bunch.  Their share prices go up the highest.

 

I'm going to use the Wilshire Equal-Weight 4500 (ie, excludes the top 500 stocks in market cap and thus is the equivalent of throwing darts at all the small-cap names).  Here's some data.

 

2003:

S&P 500 Tot. Return: +28.7%

4500 Equal-Weight:  +97.5%

 

2009:

S&P 500 Tot. Return: +26.5%

4500 Equal-Weight:  +88.0%

 

I had a study from the 2003 market that further stratified the returns.  IIRC, it stratified the 4500 small caps by debt to equity ratio.  No surprise, the bottom decile in terms of debt/equity (ie - highest debt to equity) did the best (well over 150% on average).  In fact, there was almost a perfect negative correlation -- ie low debt equity did less well (vs the overall average of 88%) and each decile of greater debt-to-equity did better.

 

FWIW,

wabuffo

 

 

[Xerxes]

I would like to discuss how the most money was made from the depths of the last crisis.

 

The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is --  buy the trashiest micro-caps you can and buy a bunch.  Their share prices go up the highest.

 

I'm going to use the Wilshire Equal-Weight 4500 (ie, excludes the top 500 stocks in market cap and thus is the equivalent of throwing darts at all the small-cap names).  Here's some data.

 

2003:

S&P 500 Tot. Return: +28.7%

4500 Equal-Weight:  +97.5%

 

2009:

S&P 500 Tot. Return: +26.5%

4500 Equal-Weight:  +88.0%

 

I had a study from the 2003 market that further stratified the returns.  IIRC, it stratified the 4500 small caps by debt to equity ratio.  No surprise, the bottom decile in terms of debt/equity (ie - highest debt to equity) did the best (well over 150% on average).  In fact, there was almost a perfect negative correlation -- ie low debt equity did less well (vs the overall average of 88%) and each decile of greater debt-to-equity did better.

 

FWIW,

wabuffo

 

I would say there has to be two-prong approach

 

Quality in the current indiscriminate selling followed by your suggestion above some months later to pick up the smaller ones that had their intrinsic value wiped clean but somehow survived

[scorpioncapital]

Does anyone feel this crash feels worse than 2008? It seems many stocks have erased 10 years+ of gains. In oil sometimes 20+ years.

[ukvalueinvestment]

No. In 2008 I was genuinely scared the financial system was broken and I would lose everything. 

 

Does anyone else have thoughts on 2nd/3rd order effects?  How will the world change after CV?

 

 

[ERICOPOLY]

Does anyone feel this crash feels worse than 2008? It seems many stocks have erased 10 years+ of gains. In oil sometimes 20+ years.

 

Certainly it is getting right down to business.  There is something to be said about ordering all consumers to literally stay home at the same time.

[Guest cherzeca]

this is a good thread.  thanks for starting it up.

 

cash cows are good in tough times, but how about companies that are near monopolies in a strategic industry...like BA.

 

BA is finally getting interesting though I would still hold fire for awhile, but what is US going to do, buy all of our planes from there EU?

[wabuffo]

BA is finally getting interesting though I would still hold fire for awhile, but what is US going to do, buy all of our planes from there EU?

 

The intervention models were setup in the 2008 crisis.

 

BA won't be allowed to fail - but bailouts will be designed to punish equity holders on behalf of US taxpayers who would take a senior position in the capital structure.  A massive US Treasury-owned preferred with a high coupon rate that takes over 80+% of BA's equity would be one model here.  (i.e, 2020 BA = 2008 AIG)

 

If any large company goes Ch. 11, then it will be the GM model.  That is, a 363 sale of the large company's good assets and NOLs into a NewCo, along with protecting employee pensions (and stranding legacy debt, wiping out old sharehodlers into an OldCo shell - with perhaps some warrants for creditors).

 

wabuffo

 

[Guest cherzeca]

BA is finally getting interesting though I would still hold fire for awhile, but what is US going to do, buy all of our planes from there EU?

 

The intervention models were setup in the 2008 crisis.

 

BA won't be allowed to fail - but bailouts will be designed to punish equity holders on behalf of US taxpayers who would take a senior position in the capital structure.  A massive US Treasury-owned preferred with a high coupon rate that takes over 80+% of BA's equity would be one model here.  (i.e, 2020 BA = 2008 AIG)

 

If any large company goes Ch. 11, then it will be the GM model.  That is, a 363 sale of the large company's good assets and NOLs into a NewCo, along with protecting employee pensions (and stranding legacy debt, wiping out old sharehodlers into an OldCo shell - with perhaps some warrants for creditors).

 

wabuffo

 

I agree, GM 363 sale effed a lot of legacy stakeholders including tort victims. that will be the game plan going forward thanks to that a**hole rattner.  but I dont see BA trending to ch11, more a liquidity facility secured by collateral.  but you pointed out an important risk to be cognizant of

[Guest cherzeca]

@wabuffo

 

"but bailouts will be designed to punish equity holders on behalf of US taxpayers"

 

that was the GSE example in 2008, but can one say, with fear and trembling, that this time is different?  a narrative, mostly false, was built to demonize GSEs but here we have the Chinese to blame!  I mght be too sanguine, but I dont think crackdowns will be harsh in connection with any bailouts this time

 

[Pauly]

@wabuffo

 

"but bailouts will be designed to punish equity holders on behalf of US taxpayers"

 

that was the GSE example in 2008, but can one say, with fear and trembling, that this time is different?  a narrative, mostly false, was built to demonize GSEs but here we have the Chinese to blame!  I mght be too sanguine, but I dont think crackdowns will be harsh in connection with any bailouts this time

 

Political climate is much different than in 2008. Businesses of all sorts are demonized just for doing business.  If BA needs a bailout the pound of flesh will weigh a ton. Bernie Sanders could be assigned to oversee its re-organization.

[Spekulatius]

Does anyone feel this crash feels worse than 2008? It seems many stocks have erased 10 years+ of gains. In oil sometimes 20+ years.

 

This crash is certainly faster. As far as worse, I guess we will see.

[Guest]

@wabuffo

 

"but bailouts will be designed to punish equity holders on behalf of US taxpayers"

 

that was the GSE example in 2008, but can one say, with fear and trembling, that this time is different?  a narrative, mostly false, was built to demonize GSEs but here we have the Chinese to blame!  I mght be too sanguine, but I dont think crackdowns will be harsh in connection with any bailouts this time

 

Political climate is much different than in 2008. Businesses of all sorts are demonized just for doing business.  If BA needs a bailout the pound of flesh will weigh a ton. Bernie Sanders could be assigned to oversee its re-organization.

 

I like that idea.

[ukvalueinvestment]

Anyone who thinks a bail out will protect equity holders is delusional.  The government's role is to keep the company going and keep people employed. 

[chrispy]

GM and the banks screwed themselves and contributed to the problem.  Today is unfortunate for some companies who simply had the world shut down and therefore their decently managed business (excluding Boeing)

[petec]

Anyone who thinks a bail out will protect equity holders is delusional.  The government's role is to keep the company going and keep people employed.

 

This assumes the bailout is company specific. I suspect what saves the bacon of most companies is fiscal spending, whether via govt investment or direct money transfers to consumers.

[shhughes1116]

Does anyone feel this crash feels worse than 2008? It seems many stocks have erased 10 years+ of gains. In oil sometimes 20+ years.

 

This crash is certainly faster. As far as worse, I guess we will see.

 

I think the pain is magnified by the speed.  Nothing like watching 25% of your brokerage account evaporate in less than a month. 

 

Given some of my restrictions for investment (from employer), about half my brokerage account is a basket of small community banks.  All with predominantly 1-4 residential exposure.  Most trade a few times per day, or at least that was the case until end of January.  Over the last month, it has been astonishing to watch how quickly they are shedding value.  I guess there are a lot of folks who are expecting a GFC redux. 

 

Maybe the tide is going out, and it is really me without the bathing suit. 

 

In the meantime, I will help myself to some more EPD, PBA, and some more community banks.

 

[scorpioncapital]

I have had more than 25 percent evaporation. And I was not holding junk. I tried this week to go defensive and even higher quality. It is in dark times that it becomes clear that serious defensive cash rich and quality protected stocks are worth more than gold. Perhaps they are good in all times. I see the stocks that have evaporated literally 10+ years of gains are leveraged , semi average stocks , entertainment or leisure companies. It seems with coronavirus people are thinking they are not going to be doing much besides eating and walking?

[ukvalueinvestment]

Thanks all.  Just to get back to my original post, it was about second/third effects of this virus and best strategies to make money - basket of levered small cap seems popular so far.  Any more thoughts - maybe not single stock ideas but themes.

 

For example, I remember that banks - the industry closest to the crisis stayed very cheap for years after.  Do you think strategy is to go to levered small caps first, and then airlines?

 

 

Let's please assume that this coronavirus will end in months and that the underlying productivity and demand in the world has not fundamentally changed.  Some things will change.  I think once all this is over a lot more people will have tried food delivery and will have decided they like it (or not).  What are the second/third order effects and what is the sector to buy.  My thoughts:

 

- Sovereign debt crisis as countries are forced to borrow on a massive scale

- This leads to further bid for quality names - "if you made money in two crises you are unbreakable"

- General further shift to online/digital as people who had never previously used online became aware of ease of setting up accounts/payments etc.

- Defined benefit pension plans are further hit by lower discount rates - this could be offset by lower life expectancies and mortalities (unlikely to be material)

- Further shift away from physical entertainment as people realise they like staying in and playing playstation etc.

- Shift away from gyms as people realise they like jogging/their peloton.

 

My current thought on the sectors to buy are:

 

Highest quality airlines as soon as I am convinced they are past raising capital, hopefully in a closed end fund that is trading at a discount.  Demand for air travel will continue rising in long term.

Levered airline industry names that have to recapitalise - eg Sydney Airport, Aercap. 

Levered small cap in a fund that is trading at a discount as soon as it's clear economy is recovering.

Capital allocators like Berkshire, Markel and Exor at point of maximum dislocation and uncertainty.

[Gregmal]

I think staying with reasonably or better capitalized companies in necessary industries will pay off. Not that it has stemmed my losses. GRBK well below book, PCYO no debt and big moat on top MSA, FRPH, GOOG and the FANGS. MSG + MSGN, basically moats, trophy assets, or cash cows already at cheap multiples. The world will go on.

[ukvalueinvestment]

Agreed you will make money.  But I want to make SERIOUS money.  Assuming this thing ends this year, I want a *3 or 4 over the next three years.

[ERICOPOLY]

Thanks all.  Just to get back to my original post, it was about second/third effects of this virus and best strategies to make money - basket of levered small cap seems popular so far.  Any more thoughts - maybe not single stock ideas but themes.

 

For example, I remember that banks - the industry closest to the crisis stayed very cheap for years after.  Do you think strategy is to go to levered small caps first, and then airlines?

 

 

Let's please assume that this coronavirus will end in months and that the underlying productivity and demand in the world has not fundamentally changed.  Some things will change.  I think once all this is over a lot more people will have tried food delivery and will have decided they like it (or not).  What are the second/third order effects and what is the sector to buy.  My thoughts:

 

- Sovereign debt crisis as countries are forced to borrow on a massive scale

- This leads to further bid for quality names - "if you made money in two crises you are unbreakable"

- General further shift to online/digital as people who had never previously used online became aware of ease of setting up accounts/payments etc.

- Defined benefit pension plans are further hit by lower discount rates - this could be offset by lower life expectancies and mortalities (unlikely to be material)

- Further shift away from physical entertainment as people realise they like staying in and playing playstation etc.

- Shift away from gyms as people realise they like jogging/their peloton.

 

My current thought on the sectors to buy are:

 

Highest quality airlines as soon as I am convinced they are past raising capital, hopefully in a closed end fund that is trading at a discount.  Demand for air travel will continue rising in long term.

Levered airline industry names that have to recapitalise - eg Sydney Airport, Aercap. 

Levered small cap in a fund that is trading at a discount as soon as it's clear economy is recovering.

Capital allocators like Berkshire, Markel and Exor at point of maximum dislocation and uncertainty.

 

 

Regarding your last sentence, I remember Markel putting almost no capital to work in 2008 when the market was down.  A lesson from 2008/2009 FWIW.