Contents of this month’s post include:
- How you should think about the Gamestop mania from the perspective of a risk parity strategy and sensible investors
- Scaled down Bitcoin and stocks toward aimed allocations. Bought more Long-Term Treasury Bonds (both EUR hedged and non-hedged)
- Monthly Update for January 2021
- Book tip: The Changing World Order by Ray Dalio (link at the bottom of the article)
- In case you missed it: My annual review of 2020 (titled “Never Let A Good Crisis Go To Waste”), filled to the brim with the best posts of the year, predictions for 2021, and review of my portfolio through the year
Hello, and great to have you back for another monthly update!
It is with a great portion of excitement that I have now sat down to finish up the first monthly portfolio update of 2021!
Good to have you here with me to review the month. In this new year, most of these monthly updates will remain familiar, but I have included some new features. Mainly, I have added a few more graphs in the portfolio review segment, which in more details shows the daily performance of my portfolio (also with comparison against the S&P 500) on a rolling 3-month period. I hope this will be a helpful tool for you when contemplating replicating a risk parity strategy.
The greatest news that has made the most headlines in January (besides the Capitoleum protests) has obviously been the short/gamma squeeze in GME and other heavily short stocks, as constructed by a group of Redditors in the subreddit r/WallStreetBets.
I am confident that you have not missed this, and perhaps you are already tired of that mania, which has already reached beyond its apex. I will not go into detail reviewing the occurrence itself, as that has already been covered by literally everyone – finance media and independent bloggers alike.
But even though the mania is not really related to the All Seasons Portfolio strategy – or even sensible investing at all for that matter – there are still elements that can be useful for the investor who is better at managing risk. I will therefore not ignore the short squeeze all together but I will focus on a few points that I have identified as important reminders for both sensible investors and FOMO traders.
If you do seek a comprehensive explanation on how the “gamma squeeze” could occur and the mechanics behind it, I found a very good text about this written by Chuck Saletta on the Motley Fool.
The WSB raid in GME is evidence of a compounding greed on the markets, and a sign of a threat to “conventional” and sound investing strategies among the retail investors space. It is not threatening those investors who are committed to follow their set rules and limits to only make sound and though out investment decision, but rather a threat to convert non-investors and some sound investors over the line from investors to speculators.
Seeing how some have made great fortunes in only a few days, can easily make one question his or her decision to invest in safer bets. It is easy to get caught up in this freakshow that has played out.
Having risen from around $15 per share in December 2020 to $325 on January 29, with and intra-day high if $483 on January 28, the share prices has since plummeted, now trading at around $63 (February 5th) with further decreases being likely. Those who entered the trades late in the euphoria have been burnt – badly.
I have followed it with great interest and some degrees of discomfort as it increases the risk that people become more prone to make shortsighted and bad investments decisions, especially when they really cannot afford that risk. Hence, here are a few risks I have identified from this debacle, that I think are worth remembering for keeping one’s head cool in obvious market bubbles.
1. Market manipulation
Having a background in law, one of the most interesting aspects to me has been the legal aspects of the GME mania, and what risks these retail investors take on themselves when pumping up a stock price on an internet forum. If a line is crossed, it is very easy that huge fines are faced from regulators, so it is adamant that caution is taken.
The WSB’s raid against Wall Street and hedge funds has been an admirable feat. It can be likened to an attempt of a French revolution of finance, where the little guys attempt to overthrow the higher classes in the investment sphere. Similarities can also be drawn to the Occupy Wall Street movement of 2011, but instead of physically trying to get access to high finance, Internet forums and low-cost brokers have aided the younger generation to make a statement en masse and without leaving the comfort of their homes.
While people are allowed to make foolish investment decisions (it is rather difficult to prohibit idiocy), deliberate manipulation of the price of a share are a form of market manipulation and is illegal. The trust and confidence in a functioning market is a vital treat of the financial world and hence many actions that put that confidence in danger have been prohibited, for good reasons. Without any such rules and restrictions, it is guaranteed that the small guy on the market would be absolutely crushed by hedge funds and foul players; the same entities that WSB wants to punish.
The question is therefore, is an orchestrated short squeeze market manipulation?
Market manipulation can be prosecuted both criminally, as well as through civil litigation by the person harmed by market manipulation, i.e. the hedge funds in this case. Rule 10b-5 of the U.S. Securities Exchange Act of 1934 prohibits any schemes, including deception, in the trading of securities. It is this rule that is the most likely to be invoked for the willful wrongdoing of certain redditors to manipulating the stock price – a classical “pump and dump” scheme – but also other rules can be considered by regulators.
It is unlikely though that all, or even a greater number of redditors or investors that have traded the short squeezed stocks will face charges. For most parts, it will be impossible for the SEC and the Department of Justice to prove willful misconduct. However, we cannot rule out that they will not charge a few scapegoats that have been most active in driving the frenzy just to set an example. This is something to be cautious with when joining r/WallStreetBets and trying to get the crowd to follow your directions for the next squeeze or rally. Do not risk stepping into the wrong side of the law.
2. There are no Get Rich Quick Schemes in investing – Why the GME boom will not repeat itself elsewhere
Now that the dust is settling on the backside of the Gamestop short squeeze, the question remains whether similar movements will repeat themselves in other assets.
The WallStreetBets message board user count has exploded to above 8 million from about 2.2 million a few weeks ago. Day after day, Gamestop and other stocks with high short interest made headlines over the world, and countless retail investors got inspired when seeing others making 10x their investments in only a few days and weeks. Of course, in the aftermath of this fantastic occurrence, a hope has ben lit in many to be part of the next great price movement.
In the hunt for the next rush, the WSB message board will be flooded by new eager investors wanting to make 1,000% gains. They will try to spur each other saying that “Hey, let’s do this brilliant thing again but on this other stock/asset.”, just as some tried to short squeeze silver. But due to the mechanics of the silver market, a short squeeze obviously did not work.
But I don’t think this saga will repeat itself. It will remain a one-time event, a legendary firework that will be fondly remember, but never to be seen again. Thousands and maybe tens of thousands of redditors will try to replicate it, but it will not happen.
Free lunches will remain absent from financial markets. Some saw an opportunity here to make a lot of money in an arbitrage through changing the narrative to jointly stick it to the 1% of Wall Street, but why wouldn’t those hedge fund managers learn from this?
Many small investors jumped on the ship too late and invested a big part of their savings late in the game. These guys and girls have since made huge losses, which are likely to increase further if these investors do not get out soon.
I think it is regrettable how regular hard-working people lose a big chunk of their savings by uneducated speculation. In many cases, family savings have been wiped out, and to me, there are few things that touch me more than when non-professional investors lose money due to lack of knowledge. It has been one of the core reasons for me to upkeep this blog – in an attempt to educate and spread knowledge of better risk management for every one. I appreciate your help in spreading the word!
Stock and options buying is a zero sum game. For each trade there is a buyer and a seller, and one of them always win and the other loses. Through the great short squeeze, the nearer the end of January we came, the more likely it became that the buyer would end up being the loser. Unfortunately, this is when many retail investors caught a case of FOMO and dismissed any sense of reason when entering what was obviously a bubble about to burst. One can only hope that as many as possible of these retail investors only invested as much as they could afford to lose, but something tells me that was not the case.
But there are also many traders and regular people that went in with huge chunks of money and do not care about the losses. To them, the most important aspect is that at least they were part of this movement to show it to the 1% and beat them at their own game (almost like Jihadists, as described by Erik Townsend on Macro Voices podcast and Smarter Markets podcast). While not proven yet, it could very well be that this whole debacle was orchestrated by the 1% as well through anonymous accounts on WSB. For example, Michael Burry, famous from the movie The Big Short and who made a fortune for his clients in the sub-prime crisis, had over 10% of his portfolio invested in Gamestop by Q3 2020. At least he (a part of the 1%) has not suffered much in this revolution.
For a short time, in the middle of the eccentric rise of the GME share price, bystanders would easily begin to question why a safe strategy is worth it, if some milennials and Gen Z:ers would make a tonne of money on YOLO trades. If it would have worked, the conservative and sensible investor’s world view would be turned upside down and you would be ending up looking like the fool.
Fortunately, reality has caught up, and while bubbles and booms will make some people money, countless more will make great losses when the rally goes bust.
3. Defensive investing, Risk Parity and All Seasons Portfolio are still attractive
From the intra-day high of $483 on January 28th, the price of Gamestop has come down to $63.77 at market close on February 5th. That price still reflects a bounce of 19.20% from the previous day. Regardless, from the top to the closing price on the 5th, the price has come down a staggering 86% in only a week.
While some individuals made a great profit if they caught the train early and were sensible enough to get out in time, most did not. Unfortunately, most of the ones getting late into the game are not usually investing, but heard of the hype through mainstream news and decided to give it a shot, as it was evident that now anyone could make a quick buck on the stock market.
These are the same individuals will now sadly be scarred from the bad experience on the stock market and be deterred from investing for a long time to come, even if they are the ones that need to be on the market the most to save for the long-term, for example for retirement or for a buffer.
Booms and bubbles will continue to come and pop also in the future. It may seem attractive to enter these frenzies, and as long as you manage your risk and get out in time, you will be OK. But for the long-term, and for the most of us who are not the very few who are orchestrating these squeezes, the most sensible thing to do is still to have the core of the investment portfolio in index funds, and even better, to balance the risk and be prepared for whatever market environment will come.
Even though there may have been a spoonful of doubt over “slow and steady” investing in the middle of the hype, when sobering up on the other side of the hysteria, reality is finally catching up. The fundamentals of Gamestop – a company with physical stores in malls – are still weak. The fair price of the stock is not $300, not even $100, and likely not even $20. Over the coming days and weeks, we will see the price steadily come down to the leves we saw before the short squeeze.
Investing remains a marathon rather than a sprint. Rather than getting sucked into speculating in these kinds of manias, you should remind yourself to keep your head cool and make well thought-out investment decisions. Remember that you would want you wealth to be intact also tomorrow and next week, so speculating in irrational bubbles will cause you more harm than joy most of the time.
Now when we have sobered up a bit and can look at the Gamestop ordeal with a bit of hindsight, we can get back to focusing on having our portfolios prepared for all macro economical challenges that lie ahead in the wake of the Covid-19 crisis. Prepare your portfolio accordingly.
I bet it is less than surprising, that I have retained my All Seasons Portfolio strategy also through this temporary hysteria, and will continue to follow this path also in the future.
If you do not have built your own All Seasons Portfolio already, I strongly suggest that you begin preparing for whatever market environment that may come as soon as possible, to better manage the risk and volatility in your portfolio, while still not forfeiting return. If you need inspiration, check out my post on How to get started with the All Seasons Portfolio strategy or check out some example portfolios.
January 2021 Portfolio Update
All right, so let us have a look at the first portfolio update of 2021.
I have done a few, but non-controversial, trades in January. Mainly, these relate to scaling down on Bitcoin and Stocks, when these have grown to constitute more than 110% of their intended allocation. Here I mean that stocks were more than 33% of my portfolio, while I aim for them to only make up 30%. This was more remarkable in Bitcoin, which briefly made up more than 6.6% of the portfolio vs. its aimed share of 3%.
If you are looking to invest in Bitcoin directly instead of exchange-traded certificates, consider using Coinbase – the most trusted cryptocurrency exchange with more than 43 million registered users, where you can securely trade and store more than 30 different cryptocurrencies directly in your own wallet.
The proceeds from these divestments have been ploughed into US Treasury Bonds, which have been significantly underweight. The timing seemed good, as yields had already increased to above 1.00% on the UST10Y. These purchases have been spread across the two versions I have of iShares $ Treasury Bond 20+yr ETF: the unhedged (IS04) and the EUR hedged version (DTLE). Emphasis was however made on the EUR hedged version, especially when I added around a small contribution of €100 into my account.
Lastly, I have scaled down the VIX exposure temporarily when the volatility index spiked above 35 during the GME mania. I aim to keep this very small cash balance for now to reinvest in VIX when volatility comes back down to the 20-25 range. I am trading here with very little cash so unfortunately transaction costs make up a greater portion of the trades than I would have wished for, but it remains a profitable trade in this particular asset class.
Since the December update, no major changes have happened to my portfolio with respect to overall allocations.
The Long-Term Government Bonds portion is inching its way upwards toward the aimed allocation of 38%, and global Inflation-Linked Bonds remain underweight. In the inflation play, as I described in the 2020 Annual Review, I continue to be overweight in gold and commodities. But if the inflation starts to pick up also when measured in CPI, I will gear up the TIPS portion as well when the risk for deflation lies further behind us.
I am also trying out a new graph this month that shows my portfolio’s performance. Here below you see the rolling 3-month return as compared to the S&P 500 stock index. Even though stocks still have been favoured in the current market environment, I have been able to keep up with the stocks index, with the difference that my portfolio has seen much lower volatility.
I have now finally recovered from the mistake in holding the “wrong” long-term government bonds through the Covid-19 crisis (global instead of US). I would have recovered eventually, but as is evident from the below graph, I have been helped a great lot by the great momentum in Bitcoin/cryptocurrencies the past few months.
This trend is also visible with the rolling 3M performance of each asset class, with Bitcoin completely disappearing outside the graph in the zoomed in graph on the left.
With a risk on sentiment on the markets, risk assets being commodities and stocks have performed particularly well the last 3 months (purple and green lines). Even with rising inflation-expectations, this is not an odd occurrence.
In one of the latest episodes of the Macro Voices podcast, Russell Napier, a well-renowned investor and author, informs that moderately increasing inflation is good for stocks, until we enter run-away inflation that eventually causes greater problems. Inflation, at least by its traditional definition of the increase in available money in an economy, will drive up prices for most assets, even stocks. But when measured inflation hits around 4% annually, and central banks need to take actions to prevent too high inflation, then stocks will be hurt, while commodities are likely to continue to rise.
Lastly, here’s a view of the ETFs in my portfolio, and the performance of each asset during the last month, in table form. To provide a more fair number for the total performance net of added cash, I have added a line with Cash in this month’s table, but on the December column as the cash has been invested in January. This will offset the effect on the monthly return of the total portfolio value that the cash addition has had, meaning that the 2.5% growth is actual, and not driven by adding funds to the brokerage account.
|iShares Global Inflation Linked Govt Bond UCITS ETF||TIPS||IUS5||€450.96||€454.71||0.83%|
|iShares USD Treasury Bond 20+yr EUR Hedged UCITS ETF||Govt Bond Long||DTLE||€625.32||€859.32||37.42%|
|iShares USD Treasury Bond 20+yr UCITS ETF||Govt Bond Long||IS04||€622.25||€697.32||12.06%|
|Market Access Rogers International Commodity UCITS ETF||Commodities||M9SA||€351.21||€374.90||6.75%|
|Vanguard FTSE All-World UCITS ETF||Equity||VGWL||€1,384.80||€1,311.30||-5.31%|
|Lyxor S&P 500 VIX Futures Enhanced Roll UCITS ETF - Acc||VIX||VOOL||€136.36||€134.88||-1.09%|
|Bitcoin Tracker One||Crypto||COINXBT||€221.28||€147.58||-33.31%|
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Looking forward to hearing from you,
Book tip: The Changing World Order: Why Nations Succeed and Fail by Ray Dalio
From the #1 New York Times bestselling author of Principles and legendary investor Ray Dalio, who has spent half a century studying global markets, The Changing World Order examines history’s most turbulent economic and political periods to reveal why the times ahead will likely be radically different from those we’ve experienced in our lifetimes.
A few years ago, renowned investor Ray Dalio began noticing a confluence of political and economic conditions he hadn’t encountered before in his fifty-year career. They included large debts and zero or near-zero interest rates in the world’s three major reserve currencies; significant wealth, political, and values divisions within countries; and emerging conflict between a rising world power (China) and the existing one (US).
Seeking to explain the cause-effect relationships behind these conditions, he began a study of analogous historical times and discovered that such combinations of conditions were characteristic of periods of transition, such as the years between 1930 and 1945, in which wealth and power shifted in ways that reshaped the world order.
Looking back across five hundred years of history and nine major empires—including the Dutch, the British, and the American—The Changing World Order puts into perspective the cycles and forces that have driven the successes and failures of all the world’s major countries throughout history.
Dalio reveals the timeless and universal dynamics that were behind these shifts, while also offering practical principles for policymakers, business leaders, investors, and others operating in this environment.
In this book, the concept of dynamic risk allocation is described in great details, together with many other relevant topics to consider for the retail investor who looks for more balance in his or her portfolio, and for understanding how diversification between asset classes can further benefit risk-adjusted returns.
I found this a highly intriguing read, with a clear and coherent analysis and portrait of the cycles of empires, and how it appears that the United States is nearing the ultimate phases of its cycle, to be succeeded by China, the potential next emerging superpower. For a better understanding of macro and geopolitics, this book sure is one you must pick up!
Or check out other great books on the topic on the Book recommendation page.
Buy it today on Amazon (affiliate link):