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What are you doing with your gains?


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Past few days, I was struggling not to take some off the table considering the 50%-100%+ moves in a lot of the holdings. I sold 50% of my cruise, restaurant, private label credit card, and hotels stocks with the exception of Airline Service Providers such as Heico, AerCap and TDG, as they are compounders chugging along amidst this economic contraction.

 

Unfortunately, it is not in my nature to trade the market, so I feel a bit skittish. However looking at what's going on, I do not necessary agree with the market's assessment that COVID-19 will be over with in 3-6 months. Even if I am proven right, it's not unfathomable for the market to go higher because we already EDIT: are halfway towards getting back to where we started.

 

Do you think I'm getting in the way of my own compounding? How are you all feeling about the gains you made with this short downturn?

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If it is 3-6 months or 12-18, it is still a short term event. Just avoid things susceptible to permanent impairments. Even better, buy durable businesses that get stronger during times like this. I've taken gains, but its just to manage the margin and rebalance.

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Take just the gain off the table, and use the cash to pay yourself back the original investment.

All of our equity positions are now funded with 100% house money - even OBE! Original investment now sitting in FI equities, purchased after dividend cuts in the the 50-75% range, and earning a cash yield in the high teens.

 

... You might also want to think a bit on what you might do - if all these investments suddenly go up 300%+ over the next 18 months. Large lottery winners often curse their win, because the sudden wealth destroyed their lives.

 

SD

 

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If it is 3-6 months or 12-18, it is still a short term event. Just avoid things susceptible to permanent impairments. Even better, buy durable businesses that get stronger during times like this. I've taken gains, but its just to manage the margin and rebalance.

 

You may very well be right Gregmal - unfortunately I feel this rally was more of an emotional one, than a rational one. Hence my ambivalence - a lot of the SMB's especially in the event and hospitality side may teeter towards bankruptcy, even with the support the government is providing. Being in the industry itself, people are worrying if they are going to still exist in the next six months.

 

If this does become true, I refuse to believe a industry-wide bankruptcy is insulated, and other industries will be unaffected. At the very least, I feel that Point-of-sales stocks may very well turn into Pieces-of-sh*ts.

 

Also when I'm trying to exercise foresight and walk in the shoes of the world's best companies, for example Starbucks, I do not think they are planning to use their spending for expansion, but rather on spending to keep afloat. With this aversion to expand, it is hard to see stocks rallying further without another dip.

 

However, I can definitely be wrong. At the end of the day, it does not matter, because on an absolute basis, stocks are not trading cheaply considering everything. Loved Starbucks at 15x-17x earnings with or without COVID-19, however 24x earnings is a bit of a stretch to reinvest my gains. I would rather wait and let the rally run out and have a cash position for at least declines in individual stocks, as opposed to 2008 situation.

 

Take just the gain off the table, and use the cash to pay yourself back the original investment.

All of our equity positions are now funded with 100% house money - even OBE! Original investment now sitting in FI equities, purchased after dividend cuts in the the 50-75% range, and earning a cash yield in the high teens.

 

... You might also want to think a bit on what you might do - if all these investments suddenly go up 300%+ over the next 18 months. Large lottery winners often curse their win, because the sudden wealth destroyed their lives.

 

SD

 

 

Thanks SD, glad to hear you're doing well!

 

 

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I've raised some cash, sold some of the visa and berkshire LEAPs i purchased a few weeks ago but I have kept the vast majority. If the rally continues I'll cash out of those and go back into holding those stocks. Going to hold the bank stocks, AT&T, phillip morris and get paid 7-8% div yields; going to hold exxon and iron mountain and get paid 10+% yields. Barring tobacco or oil literally going out of business, those I plan to hold those for a long time.

 

Sitting around 10% cash which I'll hold onto if we see another big dip, and if needed I will go on some margin to bring that up to 20% if the bargains re-appear.

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I agree the rally was an emotional one, but so was the sell off. Somewhere in between, it’ll settle, making adjustments for virus risks as well as QE Infinity and a Fed that has basically said it will print us out of this. Well, maybe not everyone, but folks with assets...

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I've raised some cash, sold some of the visa and berkshire LEAPs i purchased a few weeks ago but I have kept the vast majority. If the rally continues I'll cash out of those and go back into holding those stocks. Going to hold the bank stocks, AT&T, phillip morris and get paid 7-8% div yields; going to hold exxon and iron mountain and get paid 10+% yields. Barring tobacco or oil literally going out of business, those I plan to hold those for a long time.

 

Sitting around 10% cash which I'll hold onto if we see another big dip, and if needed I will go on some margin to bring that up to 20% if the bargains re-appear.

 

I cut about 15% off of my “accumulation pile” and added it to my cash pile. Rally does seem emotionally driven but either way there are some good companies trading at great multiples. Definitely certain sectors in staying away from but telecoms seem like a solid bet along with some banks.

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Given my investing restrictions due to work, I am mostly in banks, REITs, utilities, and a little bit of energy.  Instead of selling any of my positions, I took a small percentage of the paper gains and bought some XLF puts, and some SDP calls with cash-on-hand.   

 

To put this in perspective, I didn't take anything off the table as the market dropped, and I only added a little bit around the bottom (JPM, PBA, EPD, SJI).  in hindsight, I wish I had been more aggressive like I was in late 2018.  Maybe that opportunity will present itself again.   

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Guest cherzeca

what is your investment horizon?  if it is to be nimble over short time periods, always take at least some profits.  if for 5 years, move away from that keyboard

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I agree the rally was an emotional one, but so was the sell off. Somewhere in between, it’ll settle, making adjustments for virus risks as well as QE Infinity and a Fed that has basically said it will print us out of this. Well, maybe not everyone, but folks with assets...

 

Just to provide a counterpoint, as a market, I do not think we priced in the effects of the pandemic. Although we've seen some stocks price the pandemic and then some individually - I do think the market has to decline 10-15% more to fully appreciate a 30% reduction in GDP, unprecedented unemployment, and most of all - the aversion for spending to expand. At best, a few months go by and we decline to 30% from highs but we have more information to justify the decline because we have less unknowns.

 

I do not think this decline compares to any other decline in history.  Hence, I do not think it will be a great depression, but the decline of 2001 took two years to decline by 50% and the decline of 2008 took a full year to decline by 50%. If we follow history (not that we should), I think we should expect another decline.

 

The only way this decline will be cheap if corporations spend to expand and readjust their services to weather another pandemic, but if they stop spending and start hoarding, then it does not matter what the Feds does - they can print to infinity and we will still be in a secular decline.

 

what is your investment horizon?  if it is to be nimble over short time periods, always take at least some profits.  if for 5 years, move away from that keyboard

 

It's far longer, but many times I regretted taking chips off the table and reinvest.

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I’m surprised people are trying to time the market. Do people really think the Dow will be lower than today in 5 years?

 

I llearned a lot lot of lessons from the last great recession. In 2008 when prices were falling, I took a big loss and then ended up doing some short sales as insurance that  in the end ended up losing a little bit more. After Warren  Buffett’s letter I woke up and closed shorts and just bought and held. I’ve been getting much better since then. I haven’t  sold any stocks since about 2016 (with the exception of closing out LEAP options)

 

So I’m just holding onto my core  positions and adding...companies with strong moats (60% SSD plus others....STNE, BYD, DEO). I feel OK holding most of these through World War III. I also have a few lottery tickets with far OOM 2 year options for airlines and Six Flags. I’m also not selling these, will likely hold them until 2022, at least the ones that don’t go bankrupt (i’d be surprised if some don’t). Very risky but it doesn’t take a large position for big games if it works out.

 

I am waiting to buy more of my core positions and maybe some “lotto tickets”  if we test the previous lows or go lower. If Dow goes 50% lower than today I’ll even use leverage.

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Guest cherzeca

I try not to take profits unless I have a holy moly moment...when I sort of cant believe the ramp up, too good to be true profits.  happens very rarely of course but if it seems too good to be true, then take some profits, because dry tinder is always good to have.  but I wouldn't say we are in this environment now, more appropriate when you are hitting new highs and many consecutive + days.  as for this environment, I would be cautious about taking profits...unless you think we are in for greater corona hell

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I’m surprised people are trying to time the market.

 

...

 

I am waiting to buy more of my core positions and maybe some “lotto tickets”  if we test the previous lows or go lower. If Dow goes 50% lower than today I’ll even use leverage.

 

::)

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I’m surprised people are trying to time the market. Do people really think the Dow will be lower than today in 5 years?

 

I llearned a lot lot of lessons from the last great recession. In 2008 when prices were falling, I took a big loss and then ended up doing some short sales as insurance that  in the end ended up losing a little bit more. After Warren  Buffett’s letter I woke up and closed shorts and just bought and held. I’ve been getting much better since then. I haven’t  sold any stocks since about 2016 (with the exception of closing out LEAP options)

 

So I’m just holding onto my core  positions and adding...companies with strong moats (60% SSD plus others....STNE, BYD, DEO). I feel OK holding most of these through World War III. I also have a few lottery tickets with far OOM 2 year options for airlines and Six Flags. I’m also not selling these, will likely hold them until 2022, at least the ones that don’t go bankrupt (i’d be surprised if some don’t). Very risky but it doesn’t take a large position for big games if it works out.

 

I am waiting to buy more of my core positions and maybe some “lotto tickets”  if we test the previous lows or go lower. If Dow goes 50% lower than today I’ll even use leverage.

 

I don't think it's timing the market, but understanding what's constitutes as cheap/fair on a DCF basis considering what's going on.

 

If you've noticed I'm not waiting while there's a basket of opportunities. When Park Hotels was @$4, AerCap @$10, AEO @$6, RCL @ $20, etc. My cash went from 40% to 10% in a span of three hours - as a result the lost gains I had from not investing my entire portfolio for the last year and a half was paid back and then some.

 

Reason why I'm waiting now is because the current opportunities are like Microsoft where they increased earnings by 14%, but the stock appreciated by 80% last year due multiple expansion, which makes sense because multiples will rise due to QE. However it does not make sense with 10-13% discount rate, if companies do not spend the QE money, and hoard it. Especially since they have many reasons to do so because the lockdown can take longer than 6 months, and the coronavirus hasn't flattened yet.

 

Are there other stocks that can justify that? Yes - but many come with hairs. I do not know any that are synonymous to buying Bank of America during 2008.

 

Remember 90% of our gains, at least if you held sp500 etf came in five months out of this year.

 

I try not to take profits unless I have a holy moly moment...when I sort of cant believe the ramp up, too good to be true profits.  happens very rarely of course but if it seems too good to be true, then take some profits, because dry tinder is always good to have.  but I wouldn't say we are in this environment now, more appropriate when you are hitting new highs and many consecutive + days.  as for this environment, I would be cautious about taking profits...unless you think we are in for greater corona hell

 

Not advocating to go 100% cash, but I do think it is warranted to take off some gains from cigar butt stocks and move it to quality compounders or cash if you can't find any at the right price.

 

EDIT: This is coming from a person who does not believe in selling and never sold a share of a wonderful business' stock because of high valuation.

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Just to throw some observations out ....

 

For a great many years, we were happy with an average return of 9%/yr. Double every 8 yrs, withdraw half, and pay off mortgages or invest in new things. Today, we would be doing this every few months. Ridiculous.

 

We were happy to earn an average cash yield of 5%/yr, on a temporary FI portfolio. Today, the portfolio is permanent, the cash yield is multiples of that, and it is likely to double again within the next 2-4 years. Ridiculous.

 

We have done well because 'we' are the master, and money is the 'slave'; but it is becoming a lot more difficult.

The solution seems to be setting a maximum size, then dumping anything above that into provincial bonds. Side-bar the capital until life eventually 'normalizes', and in the interim - just give the interest away to a charity.

 

SD

 

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If you've noticed I'm not waiting while there's a basket of opportunities. When Park Hotels was @$4, AerCap @$10, AEO @$6, RCL @ $20, etc. My cash went from 40% to 10% in a span of three hours - as a result the lost gains I had from not investing my entire portfolio for the last year and a half was paid back and then some.

 

To cherry pick from your post, I was looking at both PK at $4 and RCL at $20 and am not sure why they aren't zeros if this continues for 12 months. Do you think cruise occupancy is going up anytime soon? Do you think travel will be back anytime soon? I was having trouble discounting the unknown of the virus in relation to travel. In a normal recession, hotels and cruises get hammered, and this could be the worst one they've ever had. Just wondering if you had a thesis on those industries specifically.

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If you've noticed I'm not waiting while there's a basket of opportunities. When Park Hotels was @$4, AerCap @$10, AEO @$6, RCL @ $20, etc. My cash went from 40% to 10% in a span of three hours - as a result the lost gains I had from not investing my entire portfolio for the last year and a half was paid back and then some.

 

To cherry pick from your post, I was looking at both PK at $4 and RCL at $20 and am not sure why they aren't zeros if this continues for 12 months. Do you think cruise occupancy is going up anytime soon? Do you think travel will be back anytime soon? I was having trouble discounting the unknown of the virus in relation to travel. In a normal recession, hotels and cruises get hammered, and this could be the worst one they've ever had. Just wondering if you had a thesis on those industries specifically.

 

I don't have any smoking gun, and realize there's a possibility of these being zero. However at these prices, it's effectively a single 1-3x forward normalized earning stock. I pretty much zeroed out the cash flow this year, and used a discount rate of 10-13%, assuming cash flow is fully recovered by year 1 or 2.

 

When doing DCF, I do not have just one model, but several to create a range of possibilities. I typically pull the trigger on these situations by seeing if the range has more possibilities where the stock is multi-bagger, rather than a zero, if that makes sense. Sometimes, I just look at the reverse dcf and see what growth rate makes sense but at the end of the day, I DO NOT KNOW.

 

It's a low risk, high-uncertainty situation, where good portfolio allocation is key. Some of these can go to zero, and that's okay, as long some of them go up 2-3x.

 

 

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Not necessarily totally on the topic of taking gains but a way to get access to some cash would be to sell some puts. Puts on BA exp Jan 2021 in the 60-70 range trading at ~$7.00. Selling some of those seem interesting. Gov not going to let BA go bankrupt and CEO doesn't believe a bailout is necessary. A lot would have to and can go wrong but owning BA in the 50s may not be the worst thing in the world. Worst case you buy them back for pennies on the dollar.

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Not necessarily totally on the topic of taking gains but a way to get access to some cash would be to sell some puts. Puts on BA exp Jan 2021 in the 60-70 range trading at ~$7.00. Selling some of those seem interesting. Gov not going to let BA go bankrupt and CEO doesn't believe a bailout is necessary. A lot would have to and can go wrong but owning BA in the 50s may not be the worst thing in the world. Worst case you buy them back for pennies on the dollar.

 

It's a lateral way of taking some gains - so I welcome the idea. Thank you!

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Not necessarily totally on the topic of taking gains but a way to get access to some cash would be to sell some puts. Puts on BA exp Jan 2021 in the 60-70 range trading at ~$7.00. Selling some of those seem interesting. Gov not going to let BA go bankrupt and CEO doesn't believe a bailout is necessary. A lot would have to and can go wrong but owning BA in the 50s may not be the worst thing in the world. Worst case you buy them back for pennies on the dollar.

 

The government’s not going to let BA stop operations, but that doesn’t necessarily mean the government will save the equity holders.

 

Thanks

Lance

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