How to navigate the 2022 Bear Market

How to navigate the 2022 bear market (from 9.40)

In our Investor Webinar for Stocks Down Under subscribers from 6 May 2022 we talked about the 3 investment rules for a bear market.

Given that the bear market got worse since then, we thought we’d open up this webinar for everyone. Have a look at our segment on the bear market (from 9.40)!

Full transcription below.

 

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Transcription

 

Stuart: Hello, and welcome to the weekly webinar of the dynamic duo at Stocks Down Under. I’m Stuart Roberts, and with me is Marc Kennis. It’s Friday, the 5th of May, 2022. Marc, we’ve reached an important milestone in our publication. Tell us about “Stocks Down Under Concierge.”

Marc: Yeah, that’s right, Stu. Good morning. We’ve been working on this for a while, and a lot of you will have spoken to Pete Kilby, our customer services manager, about the launch of a concierge. And we’ve got great news. It’s, we’re almost there. And it’s just a matter of a day, maybe two days, for sort of the final tweaks. We wanna be really 100% happy with it. But it’s here. And so, what is Concierge? Well, if you’ve spoken to Pete, you sort of know what it is, but for those of you that haven’t, Concierge is basically a buy and sell alert service. So, what we’ve done, and we still do, a lot of research on ASX-listed stocks, and I think, Stuart, our universe is about 1200 companies on the ASX. We’ve written about the majority of those.

But for a lot of people, that’s still, that’s a lot of information, right, so we have five editions a day, sorry, a week, to go through, and then we’ve got the webinar, and we’ve got, you know, a lot of stuff for people to read, and some of you just don’t have the time, or just couldn’t be bothered to do it. So, and for those people that, you know, only wanted sort of the best of the best, what we’ve come up with is Stocks Down Under Concierge, which gives you a very curated list of only the very high-conviction stocks that we see. And basically, what you’ll get is a buy alert with a price target, a stop loss, and once we think a stock has run its course, that could be in a week, could be in two weeks, could be in five months, could be a year, we’ll give you sell advice as well, when we think, you know, basically, the potential is gone.

So, it’s a very, sort of, easy tool to use, and so, again, it’s pretty straightforward. And so what we’ll do this weekend, we expect to launch probably tomorrow. We’ll shoot you an e-mail, and an SMS, so keep an eye out for that. Once you get that, go to “Concierge” on the website, and what you’ll see in this picture here is that there will be a new menu item, so “Concierge.” When you hit that, basically, you can sign up for a free trial, because everyone will get a three-month free trial, just to test it out. And because this service is not like, you know, we’ll have a new stock idea every week, we could only have maybe four or five a year. But the idea is that we have a performance that makes it worthwhile. So don’t expect us to send you emails every week, or text messages. It’s only when we see a really good idea that we think will do 20% to 40%. That’s sort of the target, 20% to 40% over the course of that trade.

And to give you an idea, all the top picks that we’ve had and that we’ve closed have done an average of 38.5%, sorry, 38.8% on average. So, that’s pretty good, I think. But again, we won’t be sending you a lot of emails. It will be a couple of ideas, maybe a handful per year, but those ones, hopefully, will do very well. And that’s really the idea behind Concierge, Stuart.

Stuart: Yeah. So, I read somewhere that if you start with, let’s say, $10,000, and compounded at 30% per annum, you end up with millions of dollars in your portfolio, but over the course of 20 years or so. So, if we can deliver that sort of performance, then the clients would be very pleased with this, I suspect. [crosstalk 00:03:46]

Marc: Absolutely. Yeah. And so, we’ve done a number of top picks. The ones that we’ve closed have done 38.8% on average. There’s one, Stuart, that is still open, and that’s our gold call on NST. Talk us through that one, and give us an update on what’s happening there.

Stuart: Right. So, I’ve just been at the Sydney Resources Roundup, which is a big meeting that happens every May, in Sydney, and this year was huge. There were 96 presenting ASX-listed resource companies, ranging all the way from Lake Resources down to some tiny companies, capitalized at less than $10 million. But so, a larger than usual attendance. A lot of them were developers of gold projects, or in some cases, producers of gold. So, gold is an important part of the ASX.

What to do with the commodity? Let’s talk about what’s happened to gold lately. If you’ve been tuning in to our webinars, or Friday Beers, or any of other communications, you’ll know that I’m a gold, the term is “gold bug.” Means quite optimistic on the future of gold. But, it’s interesting. Since the middle of 2020, gold has been range-trading. It peaked in middle of 2020, had another spike close to that in February of this year, each above $2000. But most of the time it spends between $1800 and $2000 U.S. Dollars an ounce. Which ran contrary to the kind of momentum we’d had prior to that, which I find interesting.

So, what’s going on? Well, part of it is the normalization of interest rates. I don’t have to tell you, if you’ve been watching the evening news lately, that right around the industrialized world, interest rates are going up. The U.S. Federal Reserve just raised interest rates by half a percentage point, which they haven’t done this century, I believe. Here in Australia, we had a .25% increase in the cash rate. Everywhere you go, interest rates are going up.

In an environment where interest rates are normalizing, going back to where they really should be, there’s effectively less money-printing. And for that reason, gold, temporarily, is out of favor, and you can see it in the chart. It spikes briefly in February as a result of the war scare, and then eases back, even though that war is far from over in Europe.

So, what happens… That’s the near term. What happens in the medium to long term? Well, I think that gold will catch up over time. Now, there’s an interesting for…a chart there. Between about 2013 and 2018-19, gold experienced a similar kind of range-trading position to what we’re seeing now. Marc, you’ll recall that you and I, when we’d meet with people over lunch or whatever, and I’d tell them, “You realize gold is going to $200 an ounce?” And there was a time when people would raise their eyebrows and say, “Marc, what kind of a crazy business partner do you have?”

Marc: Yeah, $2000, you mean?

Stuart: Going to $2000 U.S. Dollars an ounce on that run-up, which proved to be prophetic in that regard. So, what you see is a temporary range-trading situation, followed by another leap up. Now, remember, there’s been trillions and trillions of dollars of assets created by central banks around the world since the beginning of 2020. Federal Reserve being a key contributor to that, but also European Central Bank and others. And in that environment, gold, because it tends to track the overall amount of money in the global economy, will tend to re-rate. I’ve been telling people as well, bitcoin’s just a precursor of what’s coming over time, in that regard, and I think it’s reasonable to predict.

Now, the question is, if it continues to range-trade, what happens? Well, let’s talk about Northern Star in particular. We recommended that late November, at over $10. It’s come down about a dollar in the meantime. So that’s about a 10% swing down. Why do we like Northern Star? Well, its cost position is great. You’ll see, on that table, they’re talking about the all-in sustaining cost of $1600 to $1640 Australian Dollars per ounce, for the 1.6 million ounces or so that they produce. That’s up slightly. Remember, one of the biggest assets of this company is the Super Pit, in Kalgoorlie. I don’t have to tell you that after two years of labor shortages, and shortages of just about everything in the state of Western Australia, it’s a little more expensive to mine things in WA than it was two years ago.

So, more of a cost issue, but still able to produce at way below where gold is trading at right now. What I like about this company is it’s got expansion plans. It’s 1.6 million ounces at the moment. It’s headed for 2 million, just on this suite of assets that it has. It tends to grow fairly aggressively with the gold mine it’s bought in Alaska several years ago, called Pogo. And they’ve got a lot of resource still to develop. Just on the basis of that resource, you’ve got two or three decades worth of production already in the wine cellar, as it were. And they’re spending more where that came from. There’s $140 million in exploration spend.

So, that, to my mind, is a growth story. The stock has tended to move up or down with the commodity itself, but once investors get their head around the fact that Northern Star is a top 10 gold producer globally, has plans to keep growing, rather than just harvesting the assets they’re on, I think it can resume the upward trend we saw in recent days.

Marc: All right. So it’s, we’ll stick with that one, by the sounds of it.

Stuart: Yeah.

Marc: Excellent. Well, if you saw what happened in the U.S. overnight, it’s enough to scare you quite a bit, right? So, I saw NASDAQ was down almost 5%. Basically, broad sell-off in the market, after a bit of a relief earlier in the week, following the Fed announcement. But the concern right now is that the Fed may not be doing enough, and will still…they won’t be able to get inflation under control. So, we saw a big sell-off in the U.S. overnight, and it’s sort of fair to say that we’ve entered sort of bear territory, right, in terms of the market. And Stuart, you and I have been through a bunch of these already in the past 20 years, but a lot of people are new to investing, especially…

Stuart: And we’re still here, Marc. Proof that bear markets come to an end, and bull markets start again.

Marc: Exactly. So, we’ve survived. But a lot of people are new to investing, especially younger generations, and they may not have seen this sort of market, right? So, they’ve been, if they came into, if they started investing during the Corona period, all they will have seen, following the initial crash, is the markets going up, as a easy way to make money. But yeah, the truth is, there’s bear markets as well in investing. So, we thought we would have a look at that, and come up with three basic rules for investing in a bear market.

Rule number one. Don’t panic. This may sound very simple and straightforward, but we’ve seen, over the years, we’ve seen a lot of people sort of, you know, scared and panicking, selling what they have, and ending up selling at the bottom of these sorts of, you know, down cycles, and then being caught off-guard when the market recovered, and…

Stuart: Well, Marc, take a look at that chart there on the left hand side. Oil crisis of ’74. Both of us are a little too young to remember that personally, but if you look at the commentary about the period, people really thought the world was coming to an end in 1974, and look where it is in relation to where we got to, in our own lifetime.

Marc: Exactly. Yeah. Look, and that’s just two of them, right? But, and remember, this is a logarithmic scale, so, and in fact, if you look at the normal chart, you’ll see it’s almost sort of hyperbolic, right, in terms of how the market is sort of spiking over the course of 40, 50 years.

But yeah, look, the oil crises were, it was just two of them, but we’d have Black Monday. I remember that very vividly, because I was a teenager, reading through the newspapers every day, and all of a sudden, you had this massive crash on Wall Street. But look what happened. It was just a blip in the bigger picture. Same with the LTCM and ’98. We had the dot com crash, the GFC, even the Corona Crash, you know, just two years ago. Look at that move in the bigger scheme of things. So, it’s not the end of the world, although, you know, if you go back to the 1920s, for some people, it was the end of the world. But the point here is don’t panic. This is all part of investing. And the new investors don’t really know that yet.

Rule number two, and I think this is an important one, and this is personal for everyone. Take another look at your own risk profile, and when I say that, I mean have a look at what you’ve invested, what you could invest, and in a market that is probably trading sideways at best for a while, given the uncertainty around future interest rates, because that’s what it’s all about, right? What’s the Fed gonna do in the next two years with interest rates? Have a look at your risk profile. What losses can you tolerate? And I mean financially. So, you know, if there’s any money that you need, you shouldn’t be investing that in the first place, but some people may have. Have a look at that. What am I willing to lose? But also mentally. So, can you live with this sort of volatility? And is this for you? Should you be…are you better off, you know, doing some knitting stuff, or yoga? That could be better for you. Investing might not be for you. And I say this, and I know most of our subscribers are avid investors, but it’s, the point here I’m trying to make is that, you know, make sure that you don’t lose any sleep over your portfolio. So, can you take some money off the table, if necessary? Or, are you comfortable with this volatility? Then, you know, it’s all fine. Just ride it out.

And that brings me to rule number three, which is keep a close eye on your watchlist or your shopping list, is probably a better word. So, a lot of stocks have been really expensive. Just looking at Xero, for instance. It’s a great company, but the valuation was ridiculous, and we’ve written about it in “Stocks Down Under,” when stock was at $150 or $160. And right now, I think it’s around 80 bucks, or it will be soon, I think. But that, it’s, in principle, is a really good stock, because it’s got pricing power. It’s almost must have. We use Xero. We wouldn’t think of switching to anything else. So, those stocks are really the ones that you need to look at. Set an entry price. Look at what you think is realistic in terms of valuation. Try to stick to that. Don’t be afraid to miss out, because that’s gonna happen, you know, with… If you have 20 ideas on the stock market, you’re gonna miss some of them. It’s just the way things work.

But, in general terms, be selective. So, in an inflationary environment, you want stocks with pricing power. Can they pass on the costs that they’re incurring to their customers? That’s an important one. And also, rising interest rates means that companies that are not well-funded either, with equity, or by debt, they will have a really hard time going forward. And just to illustrate this point, one of our favorites is Weebit Nano, right? And it’s a risky stock in the bigger scheme of things, if you look at it, because it’s not generating revenues. It’s a risky development stock, although development has almost come to an end, and they’re commercializing. But if you look at what’s very…one of the strong suits, apart from the technology, is the fact that the company’s got more than $50 million, five zero, in capital, right? So they don’t need to raise any capital soon. They don’t need any debt. So, stocks like that, although they may be a bit risky, and, you know, tech is not in favor right now, but those sorts of stocks are what you need to look at, and I’m sure Stuart, in the commodity space, there’s a few stocks like that, that are well-funded, and have some announcements coming up. So those would be companies that we would look at in this sort of environment.

Stuart: Right. So, yeah. It’s been a while since we’ve had a bear market. Looks like we’re in another one. There will be opportunities coming through this bear market, but watch out for the turn, because when it happens, there will be good times ahead.

Marc: All right. One last comment. So, last week, we missed a webinar, and that was all due to a case of Covid on my part, so apologies for that. But what Stu and I will be doing going forward is record these webinars on Friday, just purely for logistics on our side, so don’t be afraid that we’ll miss more of these webinars. So, we’re moving them from Wednesdays to Fridays. So, actually, it’s not a substitute for Friday Beer, Stuart, but it’s the closest thing we got to it.

Stuart: Oh, so I get to have a beer now, Marc?

Marc: If you want to, yeah. All righty. Well, that’s all we have time for. We’ll catch you next week.

Stuart: See you later.