While history might not repeat itself, it does tend to rhyme. Nowhere is this more evident than in the psychological behavior of market participants. Between 1995-2000, tech stocks and day trading were the rage regardless of valuations. Ultimately the Nasdaq crashed 75% from the high to the low, wiping our many retirees savings along with it. Between 2005-2008, the belief was that real estate prices would never go down since they hadn’t since the end of World War 2. Unsurprisingly, the market crashed and The Great Recession took place.
During this crisis of epic proportions, stocks got incredibly cheap! Marvelous franchises such as Wells Fargo and American Express were available at around $10 per share or about 1/4th-1/5th of their intrinsic value at that time. Stocks were universally cheap as were many bonds, which traded at distressed levels. Mortgages and real estate became attractive again as market participants priced securities and assets as though the sun would never shine again. Unfortunately, many retirees reacted to the short-term mark to market losses and pulled out of the market completely. This caused them to miss out on a massive rally since March of 2009 where stocks have more than doubled, and many securities have gone up far more of course.
Well now in year 5 of the bull market, retirees are buying stocks at record prices. I understand the appeal, as bonds are even more unattractive than stocks, which themselves are by some measures, 20-25% overvalued. Most financial advisors focus only on stocks and bonds so they don’t operate in a manner in which they can adjust the strategy to adjust to current market conditions. At T&T Capital Management (TTCM), we are very different. We’ve shifted our allocations much more to using our cash-secured put strategy on a concentrated portfolio of deeply undervalued stocks. This creates a scenario where if the stocks are flat or rally, we will make an attractive return on our money, generally in the mid to high double digits on most positions. If the stocks drop, we will end up owning them at an even larger discount to intrinsic value. Keep in mind that we are only buying stocks that are trading at 30-50% discounts to our estimates of intrinsic value in the first place.
This strategy is far safer than only being long stocks at current prices and also does not expose investors to the same interest rate risks that are inherent in buying bonds at current prices. The question that should be asked is, why doesn’t everyone do this?
I would juxtapose several reasons. Firstly, most investors own mutual funds and most mutual funds are prohibited from using options in their charters. This makes administration easier for the mutual funds but at the cost of their investors utilizing a fabulous strategy. Secondly, most market participants think that the short-term past will continue repeating itself. I find myself amazed when I see other advisors sending prospective clients model portfolios where they use a Monte Carlo Simulation to hypothesize on what returns seem likely given a sample portfolio. Usually they only go back 10 years, so unless you believe interest rates are going to go lower or that markets will behave just like they did over the last 10 years, you can throw these models out the window as being worthless. Thirdly, most advisors are asset gatherers instead of money managers. At TTCM, I as the money manager do not play golf with clients, one because I’m terrible, and two because I spend my time researching and analyzing businesses. We are 100% focused on maximizing risk-adjusted returns and we leverage technology to be able to implement our strategies for our clients in an efficient manner.
I’ve said it before and I’ll say it again, I cannot guarantee returns but I absolutely believe that over the next decade, we will increase our outperformance against the S&P 500 by a significant margin. I believe stocks will perform quite unattractively and bonds will do even worse. Even in that type of environment, I would expect our value investing and utilization of covered calls and cash-secured puts to hold up quite nicely. Time will tell if I am right or wrong but I always want to communicate my opinions honestly with my clients and prospective clients. I see great opportunities that we can and are taking advantage of in our portfolios’, so if you’d like to add to your account, I believe that would be highly advisable. In addition, we are extremely thankful for all of the referrals that we have gotten over the last several years. As a small business, referrals are our lifeblood and I’m thankful that we’ve been able to help out our clients’ families and friends when they have been referred to us. Please know that we will continue to focus on maximizing risk-adjusted returns and will always put your best interests ahead of anything else when making investment decisions. Thank you very much and please don’t hesitate to contact me if I can be of any assistance whatsoever!
Sincerely,
Tim Travis