Why I’m Sticking Around 25% Invested

“Don’t shoot the piano player. He’s trying as hard as he can.” – President Harry Truman

No tech or basic industrials. I’ve sold down healthcare, retailing - all consumer nondurables. They’re fully priced and vulnerable to a sloppy economic setting unfolding next 12 months.

Normally, I’ve thrived following my speculative bent. Beaten down growth stocks are my meat. Banged out Meta Platforms, even some Microsoft after its rally. Let someone else own Tesla and Amazon. I can’t model their numbers next couple of years.

The sole exception for me among volatile growth paper is Alibaba, a case of self-destruction now on the mend. When Jack Ma, Alibaba’s headman, began to rail against his Chinese regulators they took him apart. The deal for Ant Financial got nixed. Prospectively, it woulda made Alibaba the preeminent financial services house, worldwide, rivaling BlackRock, with a market capitalization approximating $1 trillion.

Alibaba as a stock carried a $500 price tag written all over it. But, when regulators finished with Jack Ma, Alibaba’s stock chart looked like an expert ski trail, zooming, down from $350 to par. It’s comparable with the demise in Boeing, Tesla, Meta Platforms, Amazon and Netflix. Live by the sword, die by the sword.

How deal with the Big Board’s volatile paper? If you’re tangling with Alibaba and its ilk you run the risk of near-destruction, as in the ARK ETF Fund and certainly the Tiger Global Management portfolio which was and is predominantly weighted in technology and internet plays.

Money managers supposedly aren’t made to be cut in half by market dynamics. You’re supposed to check out early from pricey markets and come back to fight in a succeeding cycle. Nobody seems to learn from historical experience, that growth stocks don’t last forever, just 5 years or so. Lemme cite once again Morgan Guarantee Trust’s money management credo. You bought the best stories around. For Morgan, it was a 1-decision construct. Growth would bail you out in high priced paper you paid up for.

Nobody at Morgan thought of what could happen to their portfolio if recession hit, which it did early on 1973, into 1974. Their portfolio construct came apart, but they learned the lesson on diversification. They became active players in value stocks. The 1-decision investment construct was never again mentioned.

Shorting growth stocks then was as rewarding as shorting NASDAQ at its top early in 2000, when it peaked at 5,000. Couple of years later, NASDAQ bottomed at 1,000, thereby creating a giant 5-year sombrero formation. “Geez! We should have seen it coming” was the chief investment officer’s mea culpa at Morgan in 1974. Twenty-five years later, momentum players like Janus wiped out at least 50% of client capital.

My old friend, the late Leon Levy, then shorted NASDAQ and went long the euro, one of the great, but simple spreads, that rode down NASDAQ’s sombrero formation to its right side’s wide brim. If you have to think about a great concept, even a short, for more than 15 minutes, it’s probably not a good idea. (Leon logged 9-figure money.) It took just 1 phone call to his trader.

I admire Warren Buffett’s tenacity, holding onto a stock or a stock group nearly forever, but I love washouts with a story like Alibaba.

The market traded at 18.4 times earnings during 1972, not radically different than in 2000, 2014 and even today. Premiums for growth ranged up to 4 times the S&P 500 Index, but not for long. The 1973 – ‘74 recession plus worldwide competitive forces collapsed growth stock earnings at Polaroid, Xerox, Avon Products and Eastman Kodak. They never came back.

Thirty years ago, Microsoft was still a private company and Walmart, a regional discount house. I remember meeting Sam Walton, still wearing duck hunting boots from his early morning escapade. Sam explained how he had eliminated the middleman in regional retailing, thus his everyday low prices that have prevailed, day in, day out.

The average price-earnings ratio on what I own is around 10 times earnings. Financials and energy comprise the list. My one luxury is Alibaba which conceptually is a broken growthie that could make a comeback. Exxon Mobil, Occidental Petroleum, Enterprise Products Partners and Energy Transfer Partners comprise my energy list. In financials I cover 3 banks: Citigroup, Bank of America and Morgan Stanley. JPMorgan Chase sells at too fat a premium over book value and holds to a more elevated price-earnings ratio.

Get down to basics.