Daily Plan 9.27.23
Sustained Bear...
Broadly speaking, there are 3 things we can do with our money, of what is left of it after we take care of all our expenses, taxes etc.
We can either spend it ALL, we can save it or we can invest it.
I am not interested in telling you what you do with your money- after all who am I to tell you either this way or that way; if you want to spend it (or save it), be my guest.
However, I do want to share some personal thoughts with respect to how I see investing part of the equation.
Investing can be a) event based b) a dollar cost based model.
Examples of event based investing are buying a foreclosure or buying ZOOM or MRNA stocks in 2020 or selling the regional banks in March 2023. These ideas have a finite scope and objective. To time the event, get in and then get out. This type of investing requires extremely high timing talent and very low tolerance for adverse moves against the core position.
Then there is the dollar cost (DCA) based model. This model is based on “time in the market” rather than “timing the market”. Examples are if I have a 20 dollars left over every day, I invest this in an ETF every day like the VTI or a VYM for example.
After I started writing this blog, I realized this will have to be a much longer post which is beyond the scope of the daily newsletter. However, to finish my previous thought, one does need a certain amount of timing talent to do well with an event based investing time frame. However, I sincerely believe that any one with patience can do well in a dollar cost based model. A DCA based model is useful because it is not possible for every one of us to be great at timing. It is also not psychologically easy to do a lump sum investment as the fear and FUD which is active at all times in media keeps one from that. In this situation, a DCA can help alleviate fears and spread the investment over a long period of time.
The reason a lot of folks are not able to do well in DCA IMO is a) their time frame is too short for something like this to work out b) they are not consistent about the “cost averaging” part. If you look at the likes of Munger and Buffet, at the core, they are DCA investors.
They have core companies and they add to them on dips. They have done well, I think. You think so too?
Are there some cost averaging ideas that can work better than others?
I don’t think so unless we are talking about a very poorly managed fund, I think it does not really matter what the underlying investment is- it could be small caps, it could be large caps, it could be growth, it could be value- over time, the returns smooth out. The main factor really comes down to a) how long b) how much the cost is.
Now cost is an extremely important factor in a good DCA model. For example, if you look at something like ARKK which is a very popular ETF, it has almost 1% cost just for the privilege to own it and it pays 0 dividends. When you look at its holdings- they are all full of very highly correlated assets and the largest 10 holdings can be as much as 60-70% of the fund. This is NOT a great recipe to formulate a fund. Red flags for me personally, this is why I think it is just a bad DCA idea for me.
Now if I were to create my own DCA ETF, I will broadly structure it based on 3 elements - 1) stable, older companies, which pay dividends and are not all US based. I really I want to look for something with as much yield as 3-4% or even more. This could be established international companies like SAP, Novartis, Roche, Honda Motors, BP, Reliance etc . Many energy companies tend to be very cyclical. So anything a VDE type (BP, XOM, CVX, OXY) becomes very attractive during recessions 2) some growth names which are large established companies as they tend to have a large MOAT. This could be TSLA, AMD, MSFT, GOOG of the world. They still exhibit growth attributes and are large enough to have a MOAT. 3) last but not the least, some small caps as they have theoretically the most upside in terms of % gains over the life of the company. This will be small cap names which are diversified (not everything in software/technology). So this could be UBER, CRWD, PLTR, SWN, TTD, MARA, LULU etc. These are all relatively smaller to mid caps and are VERY different from each other in business models.
Last but not the least, I will say the cost or expense ratio to own these for me shall not exceed 0.05 to 0.1 % at MAX. This is like 10 cents of cost a year on a 100 dollar investment rather than a dollar. Now add 3-4% a year in yields. This can make a large difference over a decade plus of DCA.
Now this may or may not be the best way to do it, but this is how I feel most comfortable in. If someone told me I had to DCA in ARKK, I will never feel the confidence to do it as I personally do not believe in the message of the ETF. I think I have a better way to do it.
Now once I know what I will DCA in, the next step is to know how much and how often. In terms of frequency, it can be a simple rule of every 5-10% drop from the previous highs in a general index like the S&P500. It could also be progressively larger DCA as the market falls more. It is counter intuitive but the DCA investors welcome sell offs whereas every one else chases the FOMO at new highs.
This is why we see very large volume come in during periods of highest volatility rather than when the markets are one time framing up. I personally don’t like frequency based on set amount of time as that can mean many things. In terms of how much is really personal with whatever I am comfortable with. This is the money I do not need today, tomorrow or next year for that matter.
I did not include bonds in this as it does not affects me in terms of my time frames. If I was retiring in next 5 years or so, then I will include some exposure there but that is not true in my particular case.
Why am I sharing all this today?
Because this is something that I think about a lot myself. As an investor, I am constantly thinking when to invest, where to invest, how to invest etc etc. This is obviously not a recommendation for any one to do anything, but I am sharing my personal views and I encourage you share your perspectives on this topic to help us all get smarter about this. I will perhaps spend more time on this topic and do a longer post but for now this is it.
Look, time flies. Ok, we think we have a lot of time but in reality we are a blip in overall scheme of things. It is always better to start earlier than later. There is not a best time to start, however earlier the better. I guess I am saying I do not wanna wait until my retirement party to start DCA process.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
~ Einstein
Levels for tomorrow
Now the price action today took out a major support below Emini index at 4330 and closed about 10 handles below it. This is a significant level that was taken out, albeit the volume was not that much. The action today not only broke this key support, it has also now established a lower low and a lower high on the SPX index. This is an important development.
This means that 4330 level is now sacrosanct for both bulls and bears alike.
On top of that, there are other signs of technical weakness as well. Remember in the weekly plan, I had been on a lookout for a 2 day balance session- that did not come as of this post. We tried to carve out a balance yesterday and this AM but that failed. So technically and price action wise things look weak headed into tomorrow.
Due to these factors, my key level tomorrow will be 4350/4290.
Scenario 1: We could remains soft under 4350 to target some levels such as 4290.
Scenario 2: I think the bulls will need to take out 4350 for next leg higher into 4380.
Slightly longer term, so regular readers know this 4350 is the weekly level. For bulls, this level is very important. Unless we take this out, we could see more softness below 4350, possibly heading into 4170 MOAS levels (Mother OrderFlow level).
Conversely, I think if we close above 4350 on Daily time frame, we could see this bout of volatility behind us. But 4350 is a critical level.
If and when we do get to 4170, we are barely 7-8% away from some of the lower longer term levels that I have been waiting for. Things can get very interesting if and when we do get to 4170.
Now, a lot of the times we hear from the officials how the big corporations are price gauging and are to be blamed for inflation. However here at this point, nothing could be farther from truth. When you look at S&P500 corporations like TSLA and APPL- deflation seems to be the issue for them, not price gauging. Frankly I do not even think AAPL will sell a fraction of iPhones it sold last year.
If you look at all the inflation that has come in recent months- it has come from one source: the high oil prices. We predicted this several months ago. This is a result of failed energy policies. This could be a lethal combination where Oil prices do not come down, AAPL can not sell iPhones, home prices tumble while the gas/energy prices remain high for next year or two to come. Not a good place to be in.
This is it from me for now.
Have a great day. If you like the content, feel free to like, share and subscribe. More interactions from readers automatically mean more updates from me. This is a simple equation, not complicated.
~ Toc
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