The S&P 500 is down roughly 20%, the Nasdaq was down nearly 33%, and the average 60/40 portfolio is down about 17%. As we’ve discussed many times over the year, it is very rare that both stocks and bonds perform so badly in the same year. When you think back at 2020 and 2021, you really can encapsulate peak hysteria and greed in financial markets. Stocks with absolutely no earnings, nor near-term prospects for earnings traded at 15 or 20 times sales, which was unique between those years and the Tech Bubble. Crypto is really the best case study in that a multitude of coins, many that were formed as a literal joke, traded with multi-billion dollar capitalization’s. As we saw with SBF’s ponzi scheme and his restricted supply FTT token, tens of billions of dollars have been lost due to outright fraud in the space, let alone the hundreds of billions in trading losses.
Another phenomenon that we found interesting at TTCM was the growth in interest in trading stock options. Stock options can be relatively complicated and generally the odds favor the selling of options, like we do with cash-secured puts and covered calls. Many retail investors climbed into the space to buy options, often with only one week to go on them. This is immensely risky, totally akin to gambling in blackjack, arguably with worse odds. Just like with gambling, the elation of a hot streak often just increases your confidence level to bet with larger amounts, leading to painful losses. According to JP Morgan, the average retail trader is down a whopping 38% YTD. That is an absolutely brutal number and supposedly Tesla is the primary culprit, which has now lost over $500B of its market capitalization, and is down over 50%. The vast majority of those hot speculative stocks such as Carvana are down huge, some by over 90%.
Now in a bear market good companies get thrown out with the bathwater. In January of this year, we sold a lot of our Citigroup stock, often through being exercised on covered calls. We tend to sell the stock as it gets close to tangible book value per share, which has worked quite well over the years, buying when it gets to cheap, and selling when close to fairly valued. As the bear market punished the market, Citigroup was thrown out as well, despite very good business fundamentals. For example, over the last 12 months, the company has earned $15.505B in net income, yet he market capitalization is only $90B, putting the Trailing P/E ratio at 6.3, which is ridiculous. This is obviously not a struggling company, just a struggling stock. While many financial stocks have seen book value decrease due to their large securities portfolios selling off (mostly fixed income) due to rising rates, Citigroup has actually grown its tangible book value a bit, which now stands at over $80 per share, yet the stock trades below $47. Naturally as value investors, we have increased our position as the stock has gotten lower, and we feel the business is actually increasing in intrinsic value with many of the moves the new CEO is making, by divesting non-core businesses. Even Warren Buffett validated our investment thesis by buying shares in the company for the first time in many years, at higher prices than current levels. To me, Citigroup is a great example of a temporary mark to market loss. Ultimately, I believe this will turn into our biggest winners as all our purchases have been done at steep discounts to tangible book value per share and intrinsic value. This stock and ALLY Financial are great examples of securities we think are likely to double over the next 3 years if not sooner.
If we didn’t work to understand valuations and what businesses are really worth, than it would be easy to get scared away by a stock declining. Many who bought Carvana above $150 per share, are just hoping for a miracle with the stock at $5 and facing a potential bankruptcy filing. Often the options we get exercised on by selling puts, turn into our biggest winners over the ensuing years. AGO and AIG are great examples of that, as they have turned into solid winners even in this challenging year, with our positions established at far lower prices, often through being exercised on put options. I believe our portfolios are poised to really perform exceptionally over these next few years, as this is a great environment for value investing.