I’m out



I sold a lot of stocks this week. I sold most of my stocks this week. I’m now up to 79.5% cash and bonds in this portfolio. This is obviously a wildly bearish perspective for markets and the economy.

One perspective on this: I’m panic selling and I’m not taking a long term perspective.

People of this persuasion would probably say: value investors should buy when there is blood in the streets! Isn’t there blood in the streets right now?

I don’t think so. I think we are only at the beginning of a truly horrific period for the markets and the economy and I am accumulating cash to take advantage of the bottom, which we are nowhere near.

I don’t think we’re anywhere close to the end of this. This is not capitulation. My Twitter feed is still full of people talking about buying the dip. The BTFD mantra isn’t slowing down.

That is not the mentality you see at the bottom of the market.

With all of this said, yes, I’m timing the market. Yes, I know you’re not supposed to time the market. Yes, I know you’re not supposed to pay attention to macro.

Yes, this is speculation. But you know what? Picking individual stocks is speculation. I created this account for active bets. I have other accounts for my balanced asset allocations. This account is for active bets. Right now, I’m making an active bet that this is only the beginning of a massive drawdown and value stocks are not going to be a place to hide.

I’m also nearly certain I’m right about this and I’m acting accordingly. This is only the beginning of the horror show that is about to unfold. I even sold my “cash equivalent” ETF because I’m concerned about the corporate debt market, which that ETF has exposure to.

I might look like a fool for doing this by the time all is said and done, but I think this is a prudent course of action based on where we are.


Back in December 2018, I was bullish. The reason was pretty simple: I knew we were not going to have a recession and there were a lot of cheap stocks.

Going into this year, I was bearish. The yield curve had already inverted, which reliably predicts recessions 1-2 years out. The world economy was already showing signs of slowing down, and manufacturing was already in a recession.

In the recession, my expectation was that stocks would fall 50%. I thought that my 30% cash allocation would give me a decent cushion when that happened. I also assumed that throughout 2020, I would have the opportunity to gradually exit positions and build up that cash position. There was nothing gradual about this decline.

While everyone loves the buy-and-hold mantra and Warren Buffett also extols it, I think it’s a common mantra at the end of a bull market that is typically bad advice.

Buffett has a quote which people like to repeat: “Be fearful when others are greedy, and greedy when others are fearful.”

Well, to be fearful when others are greedy, you actually need to sell. To be greedy when others are fearful, you actually need to have cash on hand to take advantage of the bargains. This advice is incompatible with buy-and-hold.

The reaction to the Coronavirus is going to make a recession that was already underway even worse. This isn’t going to be a standard recession. This is going to be much worse than recent experiences. This is unlike anything we’ve experienced since the Depression.

Around me, closures are being announced all over. Malls are closed. Sports are cancelled. Airports are dead. Even among the places that aren’t closed, people are avoiding them.

Think about what is going on right now. Global trade and global supply chains are slowing. People are beginning to quarantine themselves. That means they’re not going to restaurants and bars. What happens to the people who depend on tip income at restaurants and bars, for instance? What happens to the businesses where they spend money? How about people who work at airports? Movie theaters? Daycares?

Right now, we are suspending large chunks of the economic machine.

Now, think about all of the leveraged firms that are out there. How are they going to handle the slightest hiccup in their cash flows? Will they be able to keep making payments on their debt? Or will this force them over the edge? Now, what happens to all of the people who worked for those leveraged firms? Where do those people spend money? How about the partners that these firms had? Everyone’s spending is someone else’s income.

In 2008, the peak to trough decline in GDP was only 2.24%. Think about the impact that a 2.24% reduction in GDP had on markets and the economy. With the situation that’s currently unfolding, I’m betting the decline in GDP is going to be a hell of a lot worse than 2.24%.


The thing about valuation: it doesn’t matter until something goes wrong.

Think about your typical highly valued stock. It has an absurd expectations embedded into it. As long as it continues to meet those expectations, then valuation doesn’t matter.

Of course, as a rule of nature, s*** happens. Eventually, there will be a hiccup or whiff of bad news. The stock craters. It is a phenomenon that repeats over and over again. It surprises market participants again and again.

The entire US stock market is the equivalent of a richly valued stock right now.

We’ve been lucky for the last 10 years. No s*** has happened. No recession. We had a near default in 2011, but it didn’t happen and we didn’t have a recession. We had an oil decline in 2015, which was bad for the oil industry, but good for everyone else. No recession. This is why valuations haven’t mattered and bears have become a punchline among the investing commentary class.

Now, we’re going into a storm. The s*** is hitting the fan. And we’re going into this at absolutely absurd valuations.

Recently, on a market cap/GDP perspective, we exceeded the highs of the tech bubble. The stock market was valued at 150% of GDP.  We were at 140% in 2000. We’re at 125% now.

To put this into perspective, at the lows in the early 2000’s bear market, we got down to 75% of GDP. That is 40% down from here.

And what happened during the recession of the early 2000s? Unemployment peaked at only 6%. To put this into perspective: unemployment was 6% in 2014 when we felt like the economy was booming. In the early 2000’s, we barely had a decline in GDP. The overvaluation in the market meant that an extremely mild recession was enough to send markets into a 45% peak-to-trough decline.

In 2008, the market was not as expensive. We were at 110% of GDP. The valuation fell to 57% of GDP. If we fell to this level from here, it means markets fall by another 54%. Hello, S&P 1,250.

2008 was an intense recession. However, as I mentioned earlier, that was only a 2.24% decline in GDP. Unemployment peaked at 10%. The fact that the market wasn’t as expensive as it was in 2000 probably cushioned that drawdown.

The extent of a serious drawdown is a combination of the overvaluation of the market and the severity of the recession. We were lucky that the early 2000’s recession was a mild one. I’ll bet that if we went into the 2008 recession at 2000 valuations, we would have seen a 60-80% decline in the market.

This time, we went into this drawdown already ahead of the 2000 era valuations. Meanwhile, we are likely going to get a recession that is even worse than 2008. This is a recipe for a horrific decline in the markets.

Value’s Place in This

I own a bunch of stocks with a margin of safety, right? If I already own stocks with margin of safety, then why should I care about the broader market? Why sell when I know the stock is worth more than that?

Well, the fact of the matter is that value almost always goes down with the broader market, sometimes by more. When markets drawdown, they bring everything else down with it. Serious drawdowns happen during recessions.


In every big drawdown, the US stock market has managed to drag small value down with it. This even happened in the early 2000’s. Value did well over this period, but in the middle of it, it still experienced a 31.28% drawdown.

Margins of safety don’t offer protection in recession. The margins of safety get bigger as the bear markets grind on.

Another part of the problem is that my margin of safety is based on EBIT and earnings. One of the drawbacks of this approach is that EBIT evaporates into a poof of smoke during a serious recession. Goodbye, margin of safety.

Looking Forward

Eventually, of course, I think this market will bottom. There will be fiscal stimulus. There will be monetary stimulus. There will be pent up demand from months of quarantines.

This will eventually be a stock picking bonanza, just like 1974 or 2009.

I just don’t think we’re there yet.

What if I’m wrong?

Well, that’s why I own a passive account that’s balanced between asset classes that should do well in multiple economic environments (this portfolio has 40% in treasuries and gold) and it is where I don’t try to predict the future.

If I’m wrong, I’ll have too much cash and I’ll continue lagging the S&P 500. No news there.

If I’m wrong, you can all laugh at how stupid I was to sell good businesses at bargain prices.

Frankly, I hope that happens, because I don’t want a recession or decline of this magnitude to happen. It’s going to be bad news for a lot of people who don’t deserve this. I’ll take absolutely zero pleasure in seeing this happen.

But . . . every fiber of my being tells me that I’m not wrong. I haven’t decided if I want to make an outright bearish bet on something like SH, but don’t be surprised if you see that trade soon.

I am positioning myself accordingly and trusting my instincts and my analysis.


PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.


I sold 16 shares of OSK @ $56.0236.

Sold 31 shares of NUE @ $32.59.

Sold 83 shares of MOV @ $11.70.

Sold 37 shares of PFG @ $33.

Sold 221 shares of NEAR (because I’m worried about the corporate debt market) @ $49.38.

In short, I think we’re headed for a horrific recession and there will be no place to hide. I think the market has another 30-60% downside.

When it’s all over – I want to have the cash to take advantage of the bargains.

We’ll have to wait and see if I’m right.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

I am a value investor. My outlook is inspired by the ideas of Benjamin Graham. This site is a real time chronicle of my portfolio and an outlet to share my ideas. I hope you enjoy.