Mark's Investment Blog

This is the final entry in our 2022 In Review series. It relates directly to the earlier posts in this series, so I recommend you do a quick review of it before reading this Part 4.

Successfully Managing Investments in 2022

As 2021 was winding down, in the last few months we became increasingly concerned about the risk to equity markets due to overvaluation. Some of the signs we were watching are best detailed in this quote from Dan Denning that tells you the warning signs then and updates you on their levels today:

“There are five main macro-valuation metrics we follow to get a snapshot of whether stocks are cheap or expensive. Here they are:

1. Market capitalization-to-GDP ratio. This peaked at 200% in August of 2021. It declined to 138.4% in October of 2022. It’s back to 154% now. The historic median is 87%. A return to that level from here implies a $15-$20 trillion loss in the value of all publicly traded companies in the US.
2. Yale Professor Robert Shiller’s Cyclically Adjusted Price Earnings Ratio. The recent peak here was 38.58 in November 2021. The all-time high was 44.18 in December of 2020. The current level is 29.57, or just below the 32.56 level in August of 1929. Shiller’s ratio is meant to smooth out the P/E ratio over ten years to give you a better read on whether stocks are cheap or expensive relative to earnings. They’re expensive.
3. Price-to-Sales ratio on the S&P 500. It’s currently estimated at 2.37 based on January earnings released so far. That’s down from the all-time high of 3.04 in December of 2021. But it’s above the median of 1.54. And it’s well above the all-time low of 0.80 in March of 2009. 
4. Margin Debt on the NYSE. Margin debt is down 35% from its peak of $935 billion in October of 2021. The latest figures from December of 2022 have it at ‘just’ $606 billion. The preferred method of speculation appears to have moved to options with zero days to expiration (0 DTE). Call option buying volume on O DTE has exploded this year. The subject is beyond the scope of today’s letter. But I have a feeling when it turns to put buying with O DTE, the price action could get ugly fast.
5. Dow/Gold Ratio. This is Bill Bonner’s core observation and the bedrock of Investment Director Tom Dyson’s strategy. It’s the most basic and fundamental ratio between real money (gold) and financial fantasy. The current Dow/Gold ratio is 17.6.”

I don’t really follow number 5 above, but the first four are definitely part of our methodology.

Stock Pickers Market Incorporating Macro Strategy in Portfolio Management

In Part 1, we talked about our Model Portfolio and its returns. In Part 2, we talked about it being a Stock Pickers Market and not an Index Fund market. In Part 3, we talked about the impact of Macroeconomic Influences. In this Part 4, I’ll detail for you the Macroeconomic Influences we selected to focus on in Portfolio Management and the Stocks we picked to capitalize upon those influences.

2022 Investment Strategy

In the latter few months of 2021, we adopted a defensive investment strategy for our clients, focusing on taking specific actions that would allow our clients to weather the then anticipated bear market better than others:

• Focus on industries that would have tailwinds like supply/demand imbalances:
  • Energy is the best example of this, particularly oil, but also ancillary industries like coal, deep sea drilling, oil tankers, and uranium
  • Agriculture is another, with focus on equipment and chemicals.
• Focus on industries that would benefit from rising inflation:
  • Gold and Silver are just now beginning to take off with 2023 expected to be big years for the miner
  • Commodities (which we access through an ETF)
• Focus on defensive industries that represent necessities that must be purchased no matter the economic cycle:
  • Healthcare
  • Consumer Staples
• Focus on industries that benefit from geopolitical turmoil:
  • Defense
• Focus on industries where there is a secular change occurring:
  • Green Energy which we access through investment in the miners of the metals required to make the batteries, lithium and cobalt.
• Reducing exposure to materially overvalued industries
  • Technology other than those trading at fair value

Stock Selection

Supply/Demand Imbalances

• Energy: Devon Energy, Pioneer Natural Resources, Conoco Phillips
• Agriculture: CF Industries, Nutrien, Deere

Rising Inflation

• Gold & Silver: Newmont Corp, Agnico Eagle, Pan American Silver
• Commodities: Vanguard Commodities Fund, Tecrium Agriculture Strategy

Defensive Industries

• Healthcare: Merck, Pfizer
• Consumer Staples: Pepsi, Hershey’s

Geopolitical Turmoil

• Defense: Lockheed Martin, Raytheon

Green Energy

• Electric Vehicle Batteries: Lithium America, Carpenter Technologies

Low P/E Technology

• Large Cap Tech: Qualcomm, TE Connectivity

Conclusion

There are times when index funds beat stock picking (falling interest rates) and times when stock picking beats index funds (rising interest rates). You have to know when those times are in play to best manage investments. You have to understand the trade-off between interest rates the Federal Reserve controls Vs. bond yields controlled by the market. You have to understand the outside influences that will impact the market making certain industries preferred over others. In 2022, I believe we were able to do that to the benefit of our clients.

What’s ahead for 2023? You can find out what we see as possible outside influences and some of the investments we will focus on during the year.

Thanks for reading this series and be sure to read the unofficial Part 5 tomorrow.

–Mark