The S&P 500 gained 23% in 2023.
And according to Bloomberg, the Nasdaq 100 had its best year since 1999… the year of peak frenzy for tech stocks.
And yet… the same report says retail investors had a bad year… shifting money out of stocks.
So, what’s the deal?
If the data is true, it’s the same old story.
Retail investors let the market scare them out of stocks… precisely when they should have been buying.
The question then is, how can you avoid that?
Here’s the good news: it’s possible. It’s not necessarily easy, but it is possible. We’ll explain how below.
But first, let’s catch up on how the market performed today…
Market Data
The S&P 500 closed down 0.8% to end the day at 4,704.81… the NASDAQ fell 1.2%, to close at 14,592.21.
In commodities, West Texas Intermediate crude oil trades at $73.04…
Gold is $2,049.10 per troy ounce…
And bitcoin is $42,665.
Now, back to our story…
The Right Time is Now
Let’s make one thing clear… If you missed out on the 2023 stock rally, there’s nothing you can do about it now.
So forget about it… don’t dwell on it or be sour. It’s time to move on.
But here’s the good news.
The absolute best time to prepare for the next market rally is now. Right now.
That doesn’t mean we’re forecasting the market will climb another 23% in 2024…
It doesn’t even mean we can be sure the market will add 5% or 10% this year… (although you may recall in the December 20 issue of the Daily Cut that we did draw attention to the Dow 40,000 book on our bookshelf)…
In fact, we have no idea what the market will do this year.
The only thing we know for sure is that as an investor, you need to make sure that whatever you do in 2024 doesn’t screw up your 2025… 2026… or 2027.
And so on.
That reasoning, we bet, is why so many retail investors missed the 2023 gains.
It’s no coincidence that the period when investors started pulling money from the market was from December 2022 to May 2023. That matches with the end of the bear market that started in December 2021 and the beginning stages of the current bull market…
It tells you that retail investors did exactly what you expect them to do… they stayed in the market too long after the peak and bailed out just as the market was about to turn around.
This is why we say now is the best time to prepare for the next bull market (and any bear market that may intervene).
You can see for yourself on the chart above that stocks are back near record highs. How you respond to that fact now will affect where your portfolio is two years from now.
So how should you react?
The single best strategy is to use risk management. There are many ways to manage risk. But two of our favorite ways are methods we shared with you last year.
If you haven’t started using those (or similar) methods, it’s not too late. But don’t dwell on it for too long. The sooner you can implement them, the better.
Be a Risk Manager and Don’t Be Greedy
To recap, colleague and Market Wizard Larry Benedict considers himself a “risk manager” rather than a trader. Every trade he recommends starts from the idea of how much you’re putting at risk for the potential gains.
It’s partly why the frequency of Larry’s trading tailed off during the second half of last year. It’s not because Larry necessarily thought the market would stop going up (for a start, Larry can trade both long and short).
It was because Larry saw far fewer ways to make profits in return for the risks he needed to take. Risk management isn’t just about making trades and setting stop losses… It means being flexible about how many (or few) trades to take, and how often.
Another risk management strategy we like is our other colleague and crypto expert Teeka Tiwari’s focus on asymmetric investing.
This is the idea that investors should own a core portfolio of relatively safe, dividend-paying large-cap stocks – the type of stocks likely to be around forever.
The key here is to take the cash flow (dividends) from those “safe” stocks and invest the cash in more speculative ideas, including cryptocurrencies.
If it pays off, you’ve managed to turn a small stake into a potentially big return. If it doesn’t pay off, the most you’ve put at risk is a relatively small amount. The best news is, you get to make another asymmetric bet when you receive the next dividend payment.
Let’s use a simple example.
One of Teeka’s large-cap holdings is Johnson & Johnson (JNJ). It currently trades at around $161 per share. Over the past year, for an investor owning around $10,000 worth of stock, they’ve received around $300 in dividends.
Most investors take the cash and use it as income… reinvest it in JNJ stock through a dividend reinvestment plan… or let the cash build in their account to buy another large-cap stock.
But there’s a fourth approach, the one most favored by Teeka. That involves taking that JNJ cash flow and speculating with it.
To take one example, an investor could have waited for the September JNJ dividend to hit their account on or around September 7 last year ($1.19 per share) and then speculated with that cash flow on Teeka’s crypto play, which he published on September 12.
Anyone who did so could have turned each $1.19 into $3.47… a 161% gain. For someone with around $10,000 worth of stock (approximately 62 shares), it turns a $74 dividend payment into $266 today.
Granted, we’re not talking millions… and that kind of setup won’t play out every time. The point is, it can and does happen.
It just takes discipline to follow through with the strategy. If you start thinking more about your investments from the perspective of managing risk rather than the perspective of how to get rich, we can almost guarantee you’ll have greater success.
This Will Take More Effort
We know this may sound like a lot of work because, well, it is. But that shouldn’t surprise you. You’ve made the decision that you want to be more active and more involved with your investments… That’s why you subscribed to one of our services.
The consequence of being more involved is that you have to do more. Don’t resent that. Enjoy it and make the most of it.
The Market Doesn’t Care About Your Returns
Perhaps you’ve read this and you’re thinking, “I didn’t make anywhere near 23% in 2023, so the risk management stuff isn’t relevant to me.”
Wrong.
The market doesn’t care about your returns. Even if you didn’t benefit from the full bull market run in 2023, you still absolutely must manage your risk.
Different investors will have different returns in any market. But regardless of your returns, when the market is ready to “tip over” and fall, it will do so regardless of your individual performance.
So whether you were down or up in 2023… whether you matched the market, beat it, or fell short… it doesn’t matter.
The best thing you can do today to plan for the rest of 2024 is to set in stone your risk management plan.
At the very least, that should mean adding stop losses to all your open investments… or reducing your holdings to a level that matches the risk you’re happy to take this year.
We plan on banging the drum hard on this for the rest of this year.
Unconnected Dots
Our main task at the Daily Cut is to try to “connect the dots.” That is, we help you figure out what events are about, what makes them important, their consequences, and what it all means for you.
But sometimes, we see the individual “dots,” but can’t yet figure out how they connect to anything. Maybe they never will connect to anything.
Regardless, if those unconnected dots feel as though they could be important, we’ll mention them here. And we’ll let you draw your own conclusions.
Today’s unconnected dots…
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We noticed this headline from Bloomberg News: Starbucks Adds Two Egg Dishes to Boost $3 Billion Food Business.
The story goes on to explain:
Starbucks Corp. is expanding its food lineup in its latest attempt to bring its coffee-loving customers in the door outside of the peak morning hours.
The chain will add a chicken, maple butter, and egg sandwich to its permanent menu starting Wednesday, as well as a potato, cheddar, and chive bake, according to a statement. It’s also launching a vanilla-bean custard Danish as a seasonal offering.
Starbucks wants to bolster its afternoon business as part of a broader strategy to drive growth by launching new beverages, creating products designed to appeal to customers at specific times of the day, and nudging guests to add food to their orders.
Today is a better time than a year ago to add eggs to the menu. You can see the price per dozen of Grade A eggs below:
According to the data, the price topped out at nearly $5 per dozen in January 2023. Now the price is down to $2.13…
Although, that’s still around 50% more than in December 2019.
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Another story from Bloomberg puts one more nail in the coffin of the green energy, government-bureaucracy-industrial complex:
BP Plc and Equinor ASA have terminated their power agreement with New York state for a 1.3-gigawatt wind farm in the Atlantic Ocean, blaming changing economic circumstances that made the Empire Wind 2 project unviable.
The companies said they plan to seek new offtake opportunities, according to a statement Wednesday. BP and Equinor were among a group of developers that were rebuffed in October after asking state regulators for higher rates to deliver power from offshore wind farms.
We won’t claim to be a wind energy expert… but if you can’t make wind power work off the Atlantic coast… where can you make it work?
To our mind, it just proves there is way too much government interference in the green energy economy. We’ll have more to say on this subject another day.
We’ll simply make the point that according to the Pew Research Center, 61% of Americans believe so-called climate change is a problem. Regardless of any personal views, if the majority of people believe in something so strongly, why does the government need to be involved?
Why not leave it to the free market to “solve” the alleged problem? The answer is simple. It’s about exerting control. The free market takes control away from the government and puts it in the hands of the people…
And that risks money flowing towards projects people would actually want to see happen rather than those controlled by special interests.
More Markets
Today’s top gaining ETFs…
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iShares U.S. Oil & Gas Exploration & Production ETF (IEO) +1.7%
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Global X MSCI China Energy ETF (CHIE) +1.6%
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Energy Select Sector SPDR Fund (XLE) +1.6%
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KraneShares MSCI China Clean Technology ETF (KGRN) +1.5%
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First Trust Nasdaq Oil & Gas ETF (FTXN) +1.4%
Today’s biggest losing ETFs…
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Invesco S&P SmallCap 600 Pure Value ETF (RZV) -3.6%
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First Trust RBA American Industrial RenaissanceTM ETF (AIRR) -3.1%
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iShares S&P Small-Cap 600 Value ETF (IJS) -3.1%
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SPDR Kensho Clean Power ETF (CNRG) -2.9%
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Amplify Transformational Data Sharing ETF (BLOK) -3.1%
Mailbag
If you have any questions or comments for our experts here at Legacy Research, we’d love to hear from you.
Write to us at [email protected] and just type “Daily Cut mailbag” in the subject line.
Cheers,
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Kris Sayce
Editor, The Daily Cut