The worst crash in history: the view from the front seatPosted: 2020-03-21
It seems reasonable to think that this is the worst market crash in history. Stock markets are a relatively well-documented phenomenon since their invention only a couple of dozen generations ago, and the data seem clear.
And I was there.
I’ve been actively following this crash every day the markets traded. And I’ve been trading too. Ouch. This post is deliberately something of an ermine-esque ‘reflections from the front’, recording some of my thinking/recollections, as they occur to me and while they are fresh.
Wasn’t January a long time ago?
I remember reading about the Coronavirus in January. I was travelling through Hong Kong myself that month. The virus hadn’t reached HK; it was a story in the business pages about China.
I also had my first cold/flu for 2+ years in December/January. A nastier one than normal, which has left me with a persistent slight ‘non-medical’ cough. Grumble.
The first material impacts on my portfolios were at the end of February, after Italy moved into crisis mode. I had just finished a £1m+ topup of my equity portfolio, using proceeds from my former Home.
Almost to the day, after my £1m had slid (over 2 weeks) into my investment portfolio, the markets began their steep decline. That left me down, in February, [9%], with about £250k of cash left as dry powder. FTSE fell below 7000. That is one of only benchmarks that I immediately remember, 3 weeks later. The other one is the share price of a company I used to work for, and which will be very resilient in crises.
My immediate reaction was to buy, slightly, as I was underweight equities. In particular, I bought my former company shares, at a 30% discount to their peak.
I bought Hargreaves Lansdown – which was 25-30% down on peak, courtesy I think of its founder offloading a few £00m – but which I see as a strong market leader with network effects. I bought AdiDaS, a global brand “on sale”. I bought MicroSoFT – which is a company I love but have missed out on owning. I bought DISney – owner of some of the most valuable IP in the world.
Lovely weather for an oil shock
A week or so later, and the markets have taken a savage further tumble. Triggered by the Saudis/Russians launching an oil price war.
FTSE was at 5500. I am being rung by anxious friends, or asked at work about what to do. I am clear: hold / buy. This time isn’t different. All will be a lot higher than 5500 by 2030. Carry on doing what you are doing.
My house, sold at the start of February, is gone. In financial terms. I’ve lost (in paper terms) more money than I got from the house. And, no, I haven’t ringfenced the capital gains I owe from that sale yet.
Beware the bargains
In the meantime, early in the month, I am buying. My former company share price has fallen a further 25%, to about half of its peak. I buy again.
At this point I’m struggling with what to buy. Definitely no travel businesses, exhibition businesses (I realised, only after trying to catch the INForma falling knife), or restaurant/leisure businesses (e.g. The Restaurant Group, 80% down from peak). I am also very nervous about banks, which sound OK at the moment but if businesses are collapsing then they will be next in the line of fire, and they are devilishly hard to apply the normal investment approaches to anyway.
But what to buy? I have been leaning towards blue chip businesses that have a strong dividend track record, like JPM, and the quasi FTSE tracker – CTY of London Investment Trust. I have bought RightMoVe – an impregnable business in the short term (but one which has just announced a 75% temporary price cut for all its customers!). But mostly I have been leaning towards digital, repeatable/subscription-orientated businesses. I’ve bought GOOGle, ADoBE, EXPeriaN, XeRO. And I’ve bought a few AMaZoN.
Looking back even just a few days, I was very much in ‘buy’ mode. I sold a couple of bond positions to rebalance, but my other trades were all Buys. I have barely touched my ‘dry powder’ – the buys I’ve been placing have been small, and funded out of margin loans / redemptions.
Monevator publishes @TA’s excellent “Do. Not. Sell” blogpost. A piece I am intellectually completely aligned with. So when I am being asked “but markets feel like they are still going down – why buy now when you can wait” I have no trouble answering “you can’t time the bottom; it makes no difference buying on the way down than on the way up, if you are in for the long term – don’t miss the bargains”.
Now for the main course
A week later, FTSE is dipping below 5000. It is clear now that the UK is heading for extreme measures. The US hasn’t woken up to this yet; people I’m dealing with across the pond still think this disruption is going to be weeks long, not months or even years.
Nonetheless, at this point in the journey I find myself changing posture. I know in theory I should hold, or ignore the markets, or even buy if I can. However, two factors are making me wobble.
- My margin loan. It is concentrated in my Interactive Brokers account. So my wobbling has centred on this account. My IB account in fact has some sub-accounts – with different levels of leverage. The smallest sub-account is a High Yield Portfolio, and has the least margin cushion. This sub-account is closest to running a margin call; something I am in fact quite curious to see.
- The other factor on my mind is the remaining vicious uncertainty. The UK media has discussed only one person leaving home at at a time, and all business premises being shut. It seems to me the USA hasn’t properly ‘got with the program’ yet. So there could be much more S&P pain to come. And it feels like there is a very real chance of wholesale business failures/closures – e.g. most UK retail businesses, all airlines, not to mention countless supply chain knock on effects. Perhaps, just perhaps, this time really is different.
I find myself with an allocation which is Long on Fixed Income, Short on Cash, and varying almost daily on Equities (sometimes Long US, sometimes Short UK). The pound has crashed at this point which has pulled my UK position down, but also left me shorter on Cash overseas than normal – because my margin loan in USD/EUR/etc is now bigger than it was. I still have my £200k+ dry powder.
So the w/c 16 March I was quite busy:
- Concentrating my margin loans into GBP. GBP loans are cheap, and the currency volatility is one risk too many.
- Exiting some positions. TGT, a great US retailer that has an awesome dividend paying approach, just feels too risky for me. So does SKT, an opportunistic outlet mall real estate play. Retail is Risk, right now. Cisco has been on my ‘exit list’ for a while, but as most of its revenues are Capex spending, and Capex spending i think will get clobbered in a dash for cash, I’m out.
- Reducing my US equities exposure back to target. This has left me selling (small portions of) some amazing businesses, including Verizon, Blackrock, JP Morgan and Amazon. I like all these businesses, am very happy owning them, and believe they will be even more strongly positioned in 10 years time than they are now. So I am only selling to manage my risk exposure; there is a limit to how much I can do via ETFs alone. This is fairly new behaviour for me.
- Buying Australia Equity ETFs. Australia has kept dropping; it has been my perennial underweight holding all month. I keep topping up.
With one full week of March still to go, I’m very happy with my allocation, which is shown below. I still have my dry powder (not shown in the table below – as it sits in a savings account, not in the portfolio). I’m underweight Equities (quite materially), overweight Fixed Income, and overweight Cash. I am very slightly overweight International (Eurozone and Asia), and slightly underweight UK/USA.
You could call these unders/overs a tactical (temporary) adjustment to my target allocation. If this weekend is the bottom, I will miss a bit of upside, but my underweight equities position will soon return to normal. If the knife has further to fall, I’m a little bit protected.
I believe we have quite a bit more pain to endure, but I do not believe in timing markets. And I am pretty clear why I own every holding in my portfolio. So I’m strapped in for the ride.
A few other points strike me. I’d be interested in other readers’ comments/reflections, too.
- Bonds are, in the main, doing exactly what we want them for. Behaving completely differently from equities (unlike in 2008, when correlations all converged on 1 i.e. everything tanked together). In fact they (well, government ones at any rate) have generally gone up, versus two months ago, for which we are grateful. However there are exceptions; I very nearly sold my Premier Oil 5.5% bonds last month, at 105p; now they are in distress territory at around 50p each. At individual company level, bonds carry binary risk.
- I’m down around 25% from peak. I haven’t measured exactly – the inflows of February disguise the numbers. This is not great, but it is not a wipe-out.
- For all the mayhem, a whole bunch of my equity holdings are still above my purchase price. My US index holdings, and US blue chips like Pfizer, JP Morgan, as well as the tech giants Google, Amazon are all way ahead of when I invested. Consumer staples like Diageo, Nestle, Unilever are also still up considerably on prices not that long ago.
- There is, as yet, no suggestion that the banks are exposed. If that rumour mill starts, the mayhem will get considerably worse.
- My approach to leverage is making me sell. Is this the right approach? Should I just let my leverage take up the slack? I have plenty of headroom – even in the IB account that has almost all my leverage. Somehow I have decided to trim the risk here – even though this means selling stocks like Amazon – am I actually timing the markets / selling at a low?
- For all the talk about how, as journo MSW puts it, “the entire global economy has now come to a hard stop pretty much instantaneously”, that is just not true. Plenty of people’s jobs are continuing; delivery drivers and NHS staff, obvs. Grocers. Civil servants, local councils. Journos, stockbrokers. Pensions are still being paid. And even more peoples’ salaries/income is continuing. Consumer spending will be down, and the leisure/travel sectors will be carnage, but savings will be up.
- Dividends are drying up, I fear. This will make me disproportionately sad/nervous. In ‘normal’ recessions, and stock market crashes, dividends fall much less far than stock prices. My gut says that this time, in dividend terms, is different – as companies faced with enormous sudden uncertainty will hoard cash.
21-Mar-20: UPDATED to say that on the day of writing – 21 March 2020 – I don’t directly know anybody who has had the virus. Family OK, colleagues OK, friends OK. Several people I know directly have had scares/similar symptoms. And two friends-of-friends have got it.
22-Mar-20: UPDATED to say that I have just heard that a friend of mine – younger/fitter/healthier than me and most of my mates – has had it, and given it to his immediate family. He thinks his symptoms were “upper moderate”, but now feels some relief to have had it. Thank God he and his family have recovered OK.