Market Correction February 2018

So I wrote this super long, rambling post exceeding 1000 words, listing all sorts of various trades and fairly esoteric math that only I would probably understand about opportunity cost gains and losses in the portfolio. I realized at the end of it, I didn’t really want to hit that publish button. So I think the compromise is to keep this as simple as possible.

I sold a lot of positions from February 1 – 8, 2018 as the market started correcting. My rationale was that if this was the beginning of a severe bear market, I’m protecting my capital. A lesson I’ve really taken to heart over the many years I’ve been learning this game is to not be afraid to act quickly to protect capital. I’m not going to sit around and be a bagholder in a negative position for prolonged stretches of time if i can help it.

The overall cash position across all investment accounts was sitting at around 30% going into 2018. By the end of the day on February 8, 2018, the overall cash position was sitting at around 65%.

I bought back some of those stocks and new stocks starting last week as I feel – emphasis on feel – that this was only a run of the mill correction as opposed to the start of a severe bear market. The overall cash position was back to around 30% by February 16, 2018.

The net opportunity cost of my frantic flailing around was 2.1% of the total capital I turned from stock to cash. This is a calculation based on a scenario where I had done nothing vs. the actual scenario of selling and buying.

I paid a 2.1% fee on that amount of capital because I wanted to effectively hedge in case this was the start of a major market downturn like 2008-2009.

So why all the action when, in hindsight, it was silly to pay that 2.1% fee on that capital?

The markets have been sanguine for a long time, and 2017 was especially strange with positive gains in every single month (well, except March 2017 which was a 0.04% loss). As you can see on this chart of the S&P 500 starting in 2007, we’ve been in a long stretch of positive markets.

The last time a severe bear market occurred was from 2007 to 2009.

We’re getting late into the market cycle. Central banks are gearing up to reverse the money they have been flooding into the economic system ever since that last bear market in 2007 to 2009.

The sharp turn in positive momentum in the markets starting in late-January 2018 raised my eyebrows. While I understand that the fundamental value of a company is the free cash flows it will generate from now until judgment day, momentum can quickly increase or decrease the price of a company at the turn of a dime. If markets are going to get depressed, I want to buy at lower prices, not hold at higher prices that turn into large negative positions.

In hindsight, it seems that the correction was only going to be a drop of 10% and not something more severe. Therefore, in hindsight, it would have been wise not to do anything.

I was operating on the thought that, in the moment, if this turn in momentum was going to start cascading down, I wanted to preserve capital as the bottom fell out, and start buying as the markets dropped 20%, 25%, or even 30% and beyond.

I’m not a perma-bear. Just cautious by nature. While there are plenty of bearish signs pointing to overvalued and stretched markets, there are also plenty of bullish signs pointing to a growing economy, higher wages, higher inflation, and tax cuts in the US.

Anyways, I’m always open to changing my mind. If what we experience is the “return to normal” phase in this cycle, I won’t hesitate to sell again if the momentum turns sharply again.

Until then, I am happily invested back to around where it was before the beginning of February.

Cash currently sits at just under 30% of the total portfolio.