Learn To Love Volatility

Portfolio structure, not stock picking, saves you in wildly surging markets. When it gets too hard to build an earnings model next 12 months, I’ll sell down to a 50-50 debt-equity portfolio ratio. Few stock market operators today were around for the shock of 1987’s Black Monday, when the market tanked 22%, overnight. The Street’s traders then refused to pick up their phones for 24 hours. Liquidity vanished. From 1998 to 2000, the NASDAQ Index soared from 1,500 to 5,000, then rolled over and bottomed in 2002 near 1,000. NASDAQ now ticks buoyantly at 15,500.

Sosnoff’s Major Holdings

Goldman Sachs 18.2%

Microsoft 13.4%

Enterprise Products Partners 9.7%

Citigroup 9.7%

Macy’s 9.2%

Alcoa 8.7%

Amazon 8.6%

Zoetis 7.2%

My heavyweights derive from stock appreciation past couple of years. I never take an initial position much more than 5%. The exception, Goldman Sachs, was bought at book value, early 2020.

These doggies certainly blow up in a bear market. Hopefully, I’d sniff trouble headed my way and bang ‘em out. Tie your ego to stock picking and sooner or later the Great Humbler buries you. My portfolio’s concentration, volatility and valuation violate every precept of investment management as practiced by custodial managers, bar none. But, I’m a serious investor, too. No trader, chartist or story buyer.

If coasting comfortably within the consensus on numbers like market valuation, interest rates, inflation and Federal Reserve Board policy emphasis, you should panic, markedly changing your investment construct to defensive. The consensus invariably proves wrong. Then congeals into a new construct that 6 to 12 months out proves just as fatal and costly to investors and so changes, again.

Today, on my historical perspective, stocks are at least 10% overvalued. Metrics like book value, price-earnings ratios, interest rate expectations and Federal Reserve Board policy implementation are frightening. The penalty now for missing a stock’s quarterly numbers is at least 10% overnight as in Intel on the downside and Cleveland-Cliffs on the bright side of numbers.

Analysts’ consensus on earnings expectations, always misplaced, invariably misses the mark on mega-capitalization paper like Tesla, Goldman Sachs and IBM. The Street failed to catch cyclical earnings recovery in materials plays like Alcoa, Freeport-McMoRan and U.S. Steel. Macro calls like the demise in Alibaba’s and Facebook’s footprints were ignored too long. Changed footprints for aerospace leaders like Boeing and biotech houses like Biogen, similarly were misunderstood.

Revolt against so-called authority and mainstream thought is easier to implement than you can imagine. Not by buys and sells in mainstream stocks, but using index funds and ETFs geared to specific sectors of the market like energy, technology, financials et al.

Nobody can dodge market volatility. One day in May, 2020, I watched the energy sector sink 10% intraday. Same goes for bank stocks like Citigroup, even JPMorgan Chase. You couldn’t give away materials stocks like Freeport-McMoRan, U.S. Steel and Alcoa. That day the market was busy burying stocks tied to a deflationary setting and near-zero money market interest rates.

Instead of panicking, I looked at such negativity and mumbled “Not the end of the world.” Bank stocks had traded down to book value which is where you’re supposed to step in and buy. Goldman Sachs then at book now ticks at twice book.

Not long ago, Exxon Mobil was yielding 7.8%. I knew management would rather slit their wrists than pare their dividend. Halliburton traded down from its $29 high to five bucks. The Street missed a determined management that doggedly reduced headcount and pared its capital spending. Exxon bottomed at $32, but a month or so later traded at $50, now $64. I turned up my nose on Exxon. Long standing disregard of custodial managers got in my way.

Always cast about for a broad analytical brush rather than a sharp-pencil when financial markets get crazy. Spring, last year, what got me back into a bunch of secondary stocks ($5 paper) was appreciation of Mike Milken’s MAD ratio. When you see the market value of a corporation’s stock equal to the market value of its debt, wade into the stock on the basis that the ragamuffin retains some capacity to raise additional equity capital no matter how hazy the short-term outlook.

Currently, analysts debate whether Alcoa is worth $50 or $60 a share and how elongated the up cycle in steel, aluminum and copper can last. I’m bullish on aluminum and steel, still holding positions in U.S. Steel and Alcoa. But they’re volatile and swing 5% to 10%, intraday. Over a year ago, such stocks became GDP momentum plays, no longer mispriced properties on the brink of receivership.

To own the financial sector after its double, you gotta believe in inherent leverage from net interest margins is around the corner. I’m wait ‘n’ see on this metric. Meanwhile, what’s to do with the technology sector, now the biggest S&P 500 Index weighting? The louche quality of Zuckerberg’s leadership at Facebook finally turned me off.

I’m concerned about advanced valuation for Microsoft and Amazon, but at least understand their businesses. Microsoft is the easier of the trillion-dollar market capitalizations to model over a 3-year interval. But, if Amazon can’t monetize more of its e-trade business, I’m gone a few quarters out. If you don’t understand why you own a stock, kick it out.