Trading The Shutdown And Debt Ceiling?

The U.S. shutdown is seen as hurting the economy.  One of the by-products of the shut-down is that the Federal Reserve would likely delay its proposed tapering.  Most free-market capitalists would view the latter… as printing money (that is, the buying, not the proposed tapering).

Other factors resulting from the shutdown include:

-  The one-month T-bill yields rising; also because of market uncertainty about the pending debt-ceiling battle

-  The Fed has bought $3.15 billion of notes, due for the period 2021-2023

-  The Treasury, on the other hand, plans to sell $64 billion in 3-, 10- and 30-year debt this week

Regular readers of my blog would know that I trade equities, avoiding T-bills, notes and many other financial vehicles or instruments.  In fact, the liquid part of my investment portfolio is almost made up entirely of equities (or stocks).  Other larger assets include property (illiquid) and cash (liquid).

Primary asset: $0 debt

Zero debt also implies no outstanding mortgage, this being the only real way to view a residential property, as an asset.  If your bank invested more money in your residential home than what you did… the bank owns the illiquid asset, not you.  

Usually when I invest in a company, I – psychologically – intend to hold the position forever.  However, I also have a pre-determined exit strategy that helps me to mitigate investment losses, plugged into every equity position I open, post-investment.

Without an exit strategy, most small investors lose their way; resulting in them buying on the up and selling on the down.  This is simply the wrong way around and typically driven by emotion (or greed).

If one were to do a bit of research, follow the news, etc., it’s not too difficult to find undervalued companies for investment.  Ideally before you open a position, you should decide how much of your investment you would be prepared to lose, e.g. 5%. 

Plug in a stop-loss order, or preferably a trailing stop.  By doing this, you will eliminate the emotion of convincing yourself that a stock that had tanked, may bounce back up, soon.

If you’ve done some research and invested in a diversified portfolio, it’s unlikely that all your stocks will crash, although this is possible!  A single stock may suddenly drop due to e.g. poor results for the current financial quarter, or some other unique event you may read/hear about in the media, etc.  However, a 5% drop on the Dow would represent a crash of about 750 points for the entire index!

During the financial meltdown (2008-09), the Dow suffered a few horribly negative days, posting losses in a range of 600-700.  The largest single losing day (09/29/2008), saw the Dow crashing 777 points.  However, the volatility was mixed: On 10/13/08 the Dow closed +932 and a few days later (10/28/2008) +889 for the day.

Let’s revisit the boring stats above quickly.  If you were in stocks during the run-up to the 2008-09 market crash, you were likely already sitting on some really good gains.  But without stops plugged in – as mentioned above – your holdings (and gains) would have been subjected entirely, to the mercy of the market volatility during this period.

With e.g. a 5% stop order (limit order, trailing stop, etc.), your positions would have closed automatically on 29 Sept 08, and you may have cashed a nice gain.  Even if you had only just opened the positions the day before, with stops plugged in, you would only have lost 5% and been back into cash (awaiting investment).

During such volatility, you sit on your cash, pay attention to the news, media and markets, creating your watch-list of stocks to buy as soon as things return to normal.

Over time – actually for more than 100 years – Dow stocks have grown by around 6-7% annually.  If you also reinvested the dividends, the compounded effect of this growth rate would have allowed you to mathematically double your original investment capital every 7-8 years or so.  If you were able to achieve e.g. 15% growth, you would literally double your money, every five years!

The above is not rocket science, just simplified investment information that can work for anyone. 

On Friday I visited my banker at J.P. Morgan ($JPM), who offered to park some of my cash in their high growth CD… 2 years at 1%.  Ironically $JPM stock is up almost 20% YTD, and that includes the losses suffered during the current political turmoil.  That's how they can afford to pay you 1%!

You may well be happy with the safety and return on investment of this CD – if offered to you – but the opportunity cost lost of having cash on a fixed-deposit in the bank is incredible. Imagine parking cash in a CD when even the stodgy old Dow is up almost 15% YTD!

Invest wisely!

Currently longs include: $ABBV, $AMTD, $BLK, $C, $CLB, $CRM, $FB, $HD, $PFE, $QCOM, $V & $WFC