O Captain! Your Captain: A Tale of Two Markets and Managing Your Portfolio in COVID.

Aaron Schindler

Aaron Schindler

Schindler Financial Newsletter Q3 2020

By Robert Lovenheim & Aaron D. Schindler, CFP ®
Edited by Mitchell Coopersmith
© 2020 Robert Lovenheim and Aaron D. Schindler CFP®, All Rights Reserved

September 2020 Two ships sail past each other, but don’t meet. One is sailing from Japan loaded with money, and the other is sailing to Japan loaded with money. Like the old joke about journeying to Jerusalem, one captain yells, “You’re crazy for coming” and the other captain yells back, “You’re crazy for leaving.” 

A Tale of Two Equity Markets: Where Is Value?

One captain is Masayoshi Son, head of SoftBank Group Corp., the forward-thinking Japanese investment team whose Vision Fund first hit the jackpot with Alibaba and is heavily invested in high flying Tesla.1 The other captain is Warren Buffet and his Berkshire Hathaway company that owns Burlington Northern Santa Fe Railroad among its jewels and focusses on long-term value dividend investing.

Captain Masayoshi made no announcement until he was outed by the Financial Times as the “NASDAQ Whale” who had contributed to driving up the price of tech stocks through options and purchases of $50 billion over past months. The FT linked this to the huge rise in major tech stock prices during the last two quarters, before their sudden retreat on Sept. 4.[1]

These two ships illustrate the bifurcated market that we are now experiencing in American securities. We can loosely label one market the COVID Express Masayoshi market. For me, this market includes a small basket of high-flying tech and healthcare stocks whose valuation multiple (PE = Price/ Earnings Ratio) has sky-rocketed as prices have risen much faster than earnings. I include companies who have benefited from COVID and sheltering in place such as Amazon, Apple, Google, Johnson & Johnson, Microsoft, Moderna, Netflix, and Zoom. Per Morningstar, on September 9th the Current PEs of these companies ranged from 0 (Moderna) to 121 (Amazon). JNJ had the lowest PE for a company with earnings at 25.8 followed by Google or Alphabet C at 33.1 and Apple at 34. Netflix’s PE was 121.

If my usual preference is to purchase stocks with PEs below 20 (unless I believe in the prospect of large rapid growth), it is probable that the above mentioned COVID Express stocks are overpriced. And this minority basket of COVID Express Stocks, due to market capitalization and other reasons, has greatly influenced the rebound of indices such as the S&P 500 and NASDAQ from their March COVID lows. Keep in mind that Large Cap Growth is one of the best performing sectors year-to-date up approximately 20% as tracked by IVW, the iShares S&P 500 index.

The second ship in this bifurcated market can loosely be called the Buffet Slow & Steady Value Market. Captain Buffet recently announced buying shares in five leading Japanese banks (on 5-4-2020) worth about $7 billion. Berkshire intends to hold the investments long-term and may increase holdings in any of these banks to just under 10% of its overall portfolio.[2] Keep in mind that Global Financials is one of the worst performing sectors year-to-date down approximately 18% as tracked by IXG, the iShares Global Financials ETF. Buffet has traditionally looked to make value buys of equities with lower PEs and some with dividends. He is investing for long-term growth and in some cases to get paid or collect dividends while waiting for that growth.

Dividends Can Boost Returns

In a Hartford Funds’ 2020 Insight study entitled The Power of Dividends, Past, Present & Future, Hartford Funds and Morningstar stated that from 1930–2019, reinvesting dividend income contributed on average 42% to the total return of the S&P 500 Index.[1]

In the Captain Buffet’s Slow & Steady Value Market, I seek to invest in companies beaten down by decreased consumer COVID spending in sectors that have the potential to survive and thrive. Ideally, a value company’s stock will pay a dividend and grow over the long-term. However, one should not purchase a company simply because it provides a high dividend. Before investing, one should analyze a company’s revenues and cash flow, and the company’s ability to invest in operations, staffing and research, while still maintaining its dividend. One might look for companies with the cash flow and earnings to regularly grow their dividends.

With many public schools opening virtually, office buildings remaining empty, a high unemployment rate, the U.S. Congress at an impasse per renewing unemployment and Payroll Protection Program benefits, the flu season approaching, and a potentially tumultuous presidential election, I would be surprised if we do not witness another broad equity market correction. I, therefore, continue to emphasize portfolio allocations with lower equity and higher U.S. treasury index positions to potentially reduce portfolio downside. I continue to emphasize diversification by holding both COVID Express Stocks and Slow & Steady Value Stocks with significant dividends. I look to increase equity positions at lower prices during market corrections. You can learn more about sectors that I am following by reading our May 2020 newsletter entitled The Velocity of Your Money: Investing in Logistics. Not Tactics.

Let’s Schedule A Financial Review

My job as your financial advisor is to navigate both calm and rough seas for your portfolios. My sailboat is still moored in the Great South Bay. I will remove it to the safety of dryland before a September or October Nor’easter scuttles it. While the end of the sailing season will make me sad, I am looking forward to collaborating with you to embrace change and creativity with the intent of protecting yet enhancing your financial lives as the new season approaches.

Copyright 2020 Robert Lovenheim and Aaron D. Schindler CFP, All Rights Reserved | Not for reproduction without permission and consent by Lovenheim and Schindler

1Kana Inagaki, Katie Martin, Robert Smith and Robin Wigglesworth, September 4, 2020, “SoftBank unmasked as ‘Nasdaq whale’ that stoked tech market,” Financial Times, September 4, 2020, https://www.ft.com/content/75587aa6-1f1f-4e9d-b334-3ff866753fa2

2Theron Mohammed, “Warren Buffet has $7 billion invested in 5 Japanese trading houses. Here’s a look at the ‘sogo shosha,” Markets Insider, September 3, 2020, https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-7-billion-japanese-sogo-shosha-companies-2020-9-1029561054

3Hartford Funds, 2020, The Power of Dividends Past, Present, and Future, https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf

S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market.
NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Each company’s security affects the index proportion to its market value.
Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future returns.
All investments contain risks and may lose value.
Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. 2020-108471 Exp 09/21

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Aaron D. Schindler and Mitchell Coopersmith are  Registered Representatives and Financial Advisors of Park Avenue Securities LLC (PAS), 355 Lexington Ave, 9th Floor, New York, NY 10017, (212) 541-8800. Securities products/services and advisory services are offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Wealth Advisory Group LLC and Robert Lovenheim are not affiliates or subsidiaries of PAS or Guardian.