Reilly’s Rules for Turbulent Markets
Posted on Sunday, May 15th, 2022
Good investing is overwhelmingly just about how you behave. It’s about your relationship with greed and fear, how gullible you are, who you trust, who you seek your information from, your ability to take a long term mindset, long-term time horizon. That’s what actually matters. That’s what moves the needle more than anything else. – Morgan Housel
I know we said this last week but we felt the need to emphasize it again. We have spent a lot of time answering emails and taking phone calls. Most of the calls have been from my more aggressive investors looking to cautiously add to their holdings and take more risk. They tend to be right over time.
If you are struggling we would caution you about watching the news – particularly the political drivel – see above. Do not let the news get to you. Filter the information. When the seas get rough I have two basic underlying thoughts.
Basic Underlying Thought #1
Long term mindset – Idiots have been in charge in Washington DC since George Washington. We have survived and thrived as a country not because of our leadership but in spite of them. We will do it again.
Example: The Russian Sanctions over Ukraine. It is pure idiocy. We are effectively sanctioning ourselves. The IEA reported last week that Russia’s oil revenues are up 50% this year. The sanctions have pushed oil prices to their highest level in a decade. The US and Europe were not ready for war with Russia but Putin was ready. I don’t care. The important thing to do is analyze who we think the winners will be in this environment of inflation, higher food and oil prices and geopolitical upheaval. – i.e. Arab Spring.
Basic Underlying Thought #2
Manage your fear. The stock market is rigged. It is rigged in your favor. On an annual basis the stock market goes up 78% of the time. So many people benefit when the stock market goes up. Pension funds, insurance companies, individuals and the government all benefit from higher asset prices. Could it be that the Federal Reserve would like them to go down for a time? Perhaps, cool off the speculative excess. That is their job. That’s what they are doing. Betting on the end of the world is a bad bet.
We told you months ago that we are in an 18 month trading range and a bear market. Our options research has been spot on and has helped us navigate through the markets twists and turns. We are still in negative gamma and that works both ways – big moves up AND down. So far, our trading range is holding. The S&P 500 hit 3857 for the low this week. Our range has been 3800-4800. We are now 5 months into this bear market. Things are still volatile – especially if we fall below 4000 – which gives us a real chance at a capitulation selloff. Things have been very orderly so far. The cracks we have seen have been exposed in the far riskier portions of investing classes. The next chance for the market to get a clean slate and move back into positive gamma is May 20th. Patience is the key. The average drawdown for the market is 13%. That should happen every year. We had a 20% selloff in late 2018. We had a 35% selloff in 2020. We were prepared for those draw downs and took advantage. We were underweight stocks again and are prepared to add stocks at a discount. The market is working off the excessive valuations. Are we there yet? The trading range is the bulk of where trading should take place over the next 13 months. Could it move lower than our 3800 target? Yes and that is where the opportunity lies.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.