Well 2016 has certainly began with a roar of negativity. We’ve had Iran and Saudi Arabia severing diplomatic ties at a crucial time for the Middle East, North Korea claiming to have launched a hydrogen bomb, and China has had two 7% declines that shut down its stock markets. In addition the Chinese Yuan has been revalued lower, rattling markets further. All in all globally markets are down big. What does it mean? Honestly, not much. Remember that investing is a marathon and not a sprint. Nothing has fundamentally changed with our investments in the last week. We are not invested in Chinese stocks. Our biggest exposure to China is GM, which manufactures the cars it sells in China locally, so that it benefits from the depreciated Yuan. U.S. sales hit an all-time high and business is great for GM. The financials will begin reporting earnings next week. I expect results to be reasonable and definitely profitable. That is the key and what will drive strong performance. Oil continues to struggle but that is nothing new. Our exposure is very limited to the sector and while it impacts us over the short-term, these energy investments should be looked at with a 3 year time horizon as oil will recover!
Remember that we have been taking profits on options aggressively over the last year, which has helped us quite a bit. Now we are very close to the January expiration. Many options will expire worthless (meaning we will keep the whole profit) and many will be exercised into long stock positions. By being long more stock at attractive prices we will be positioned for tremendous upside. Things look to be oversold so when we get that recovery, we should be fully exposed to it and in the right investments. Remember that when you are exercised it will show the strike price but you have to subtract the premium that you collected to know your breakeven. Those numbers are found in gainskeeper and we can certainly help you out on our end. We just need to do what we always do and be patient and disciplined. We have very few long-term options, so the increase in volatility will allow us to sell puts at very high rates of return as cash frees up or is added to accounts. This is a good environment for us. We are in good value stocks that I really don’t believe that we are highly susceptible to a downturn, barring a major U.S. recession which doesn’t seem likely at this point. Most stocks outside the largest glamour stocks are in a bear market, so things have gotten a lot cheaper. A lot of those glamour stocks are starting to lose their shine and have begun to sell off materially. Our stocks are insanely cheap and trade well below their growing liquidation values. My advice is to not get too caught up in the news and let’s let the fundamentals play out. As earnings come through and we get more economic reports, I believe value will shine through.
I can assure you that guys like Warren Buffett and Bruce Berkowitz don’t get scared at weeks like this. They buy more and stay disciplined. That is why they are successful. Volatility is an inevitability so we must use it to our advantage instead of letting it dictate our emotions. Thank you very much and as always if you need anything, never hesitate to call.