Buy tech stocks during market volatility
Some behavior betrays inexperienced investors in much the same way a poker player gives away clues. For example, we will often hear readers talk about a certain price level being “a good buy” for a particular stock. Trying to call the bottom for a given stock is pointless. A February 14 article on Seeking Alpha spoke of an “attractive valuation” for Palantir (PLTR). This Valentine’s Day recommendation didn’t show investors much love, as PLTR sold off sharply when the company reported earnings, followed by a massive dump by ARK Invest. Whoever wrote the following Seeking Alpha article must be eating a big plate of crow right now.
Experts from Seeking Alpha and other platforms often give out nonsensical advice in the form of clickbait articles that focus on short-term speculation. It’s a surefire way to erode your wealth.
Avoid red flags
Another mistake investors make is paying too much attention to the rollercoaster trading activity of active fund managers like ARK Invest. Imagine commanding tens of billions of dollars in capital and trying to decide what business decisions to make in the face of extreme criticism. Many factors related to ARK’s decision-making process are opaque, although they share with investors some of the reasons for their trades. For example, their big Palantir stock sales recently could be – at least partially – attributed to this short research note they published on the subject.
The comment about “a significant deceleration in growth in the major government division” is exactly what we warned of last April. We don’t invest in businesses that are too dependent on a small number of customers, especially if it’s the US government. Then, just a few days ago, a senior analyst at Citigroup was on CNBC talk about how Palantir’s SPAC strategy looks nefarious, something we talked about last August. We don’t just emphasize these points because we like to brag (We do), we also emphasize how important it is to pay close attention to red flags, especially when all the voices around you are optimistic. Be afraid when others are greedy, and vice versa.
Be greedy when others are afraid
As a risk-averse investor, Warren Buffett is probably the market guru we most admire, and one of his oft-cited wisdoms is to be greedy when others are scared. One way to measure fear is to look at volatility which can be measured by the Cboe Volatility Index (VIX) which can be time-mapped like any asset.
In the table above, there are two peaks. The one on the left is the 2008 financial crisis, and the one on the right is the market’s reaction to Rona. We can also see that volatility has recently increased as geopolitical events increase risk in global markets. This is probably the most objective way to measure fear in the markets, and it tells us that people aren’t really fearful right now.
call a fund
Trying to determine when a stock has “bottomed out” is another mistake that all investors inevitably make. Sometimes the bottom takes a long time to arrive. A good example of this would be Invite(NVTA). You may recall ARK Invest talking about what a good Invitae deal was like when the market crashed in March 2020 and stocks were trading around $10 a pop. Two years later, they are trading even lower than that. If even professional money managers can’t call a fund, why would your average retail investor think they have a chance?
We currently own shares of Invitee which we were buying slowly over time using dollar cost averaging. We stopped buying shares after committing the full amount of capital we had allocated to the position. It continued to decline and is now over 60% below our cost basis. Since our thesis has not changed to our knowledge, there is nothing else to do but wait. We will likely check with the company soon so investors considering establishing a position or adding to an existing one can see how the company has progressed since we last reviewed them in June 2020.
If you only buy from quality companies, you won’t have to worry about trying to catch falling knives. A company’s intrinsic value provides some level of support in the form of mergers and acquisitions that can occur when stock prices fall. That’s the idea anyway, but you can never tell how far things will go.
When the market corrects
There are many ways to measure a “bear market” or “correction,” but it only takes common sense to gauge how punished the markets are at any given time. Just look at the Nasdaq five-year chart and you’ll see that the current “correction” hasn’t really been very significant.
The red arrow above shows the market reaction in March 2020 to the emergence of COVID-19 which was short-lived.
Tech stocks could fall to the levels they were at just before COVID-19, which would mean a decline of around 33% today’s levels. Of course, a drop to pre-pandemic levels would assume that this global pandemic had no impact on the global economy, which is not true. The trillion-dollar travel industry has been decimated, not to mention that we’re still seeing supply chain issues emerge as the bullwhip effect sets in. In fact, one could easily argue that a proper correction would fall below pre-pandemic levels for growth stocks given that they have been on an absolute tear for the past decade.
You could argue that the economic value added over the past few years has managed to offset the impacts of the pandemic, but the net effect should have been a flat line, not a growth of +50% based on today’s levels.
Buy tech stocks in 2022
We currently have dry powder which represents about 17% of the total value of our technology stock portfolio. This cash remains in our technology portfolio and could potentially be added by liquidating our two technology ETF positions (something we have already decided to do) which would give us a cash position of about 22.5%. As we discussed late last year, size matters for tech stocks, and we don’t want to increase our overweight to smaller stocks if we can help it.
Faced with increasing geopolitical risk, we are not inclined to believe that now is the time to buy because everyone is scared. The VIX index tells us that the real fear is not yet affecting the markets, while a quick look at the performance of the Nasdaq index tells us that a correction has barely taken place. Our strategy for 2022 will be to make selective purchases for assets that have fallen significantly below our cost base. As a precaution, we will not buy any stock unless it has fallen 30% or more below our cost basis. We will also not commit capital to a single position.
As for buying new shares, this is also something we approach with concern. We are currently maintaining our target number of positions (36) and could potentially increase that number by four until we hit our hard stop (40). Corporate events such as acquisitions could also free up niches. What we would like to do is identify the gaps in our coverage where we lack exposure (electric vehicles, for example) and then identify suitable candidates for investment. This way, when the cow manure really hits the spinning blades, we can add names that we really want to keep.
Finally, we want to address paper waste. The February version of Nanalyze Disruptive Technologies Report is red across the board in our own technology stock portfolio. Seeing all that red is hard for some to bear, and that’s why you should only allocate a percentage of assets under management to technology that matches your risk tolerance. For us, that number has always hovered between 22% and 17%, where it is today.
Having a diverse basket of asset classes means you’ll usually always have something to celebrate when your tech portfolio goes off the rails.
During bull markets, everyone is a successful stock expert with a large following. It is during bear markets that risk averse investors start to be taken more seriously. Since 95% of professional investment advisers can’t beat a broad market benchmark, don’t think that a few Saturday afternoons of due diligence will put you in the 5% that can. Savvy investors like Buffett only invest in businesses they understand using simple, rule-based strategies that keep human emotion from getting in the way — like buying when others are scared, but don’t try to time the market.
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