- Random Words: The Investing Unscripted Newsletter
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- I Sold Some Stocks and Shorted the Market
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Jason’s Random Words
That’s some headline, huh? Selling stocks. Shorting the market. Sounds like a pretty stark deviation from my long-term goals, and the framework that I use. After all, I’m still very much in the net-contributing, and time-is-my-biggest-asset place in the continuum of my investing journey. I’m still measuring the time between today and reaching most of my financial goals in decades. We are in our prime earning years, and we have managed to avoid lifestyle creep as our income has grown.
Even with our son outgrowing his — man this stuff is expensive — sporting goods and apparel faster than our discretionary spending, we still have a decent margin of safety, and enough emergency savings and adequate insurance that insulates us from a lot of what is happening in the real world right now.
What and Why I'm Selling
Okay, the headline is intentionally bombastic, but I have done a pretty decent amount of selling — for me — since the market’s recent peak in mid-February. In all, it’s equal to about 1.7% of my portfolio’s current value, a relatively small amount, all considered.
Next, the “why.” This was a combination of weed trimming, moving on from some ideas that weren’t panning out for me, and taking a step back. Here are the stocks I sold, and why:
Redfin (RDFN): I am not interested in owning Rocket Companies (RKT), which has reached an all-stock deal to buy Redfin.
Zillow (Z, ZG): It could be a big winner. But residential real estate is a mess right now, and I want to see if the ongoing consolidation of platforms (note Redfin deal above) give it an advantage. I may buy again. For now it’s in the “too hard” pile.
Boston Omaha (BOC): This could prove a bad time to sell, if investments in residential fiber and wireless broadband start paying off. But the returns on its billboards business have been paltry, and I think it overpaid for those assets. I see too many other opportunities to keep waiting for a turnaround.
23andMe (MEHCQ): An excellent reminder that “how much more can it go down” is 100% more. I sold about a week before the company filed for bankruptcy. I held because was convinced that its founder would put together a deal that saved a little bit of equity value. That didn’t happen.
Etsy (ETSY): I could make the case that it’s a buy, trading for a single-digit free cash flow multiple, but my concerns trumped the value play. Buyer counts are falling, less money is changing hands, and revenue growth is entirely coming from higher fees paid by sellers. That’s not a recipe for success, and this could be a value trap.
Put it together, none of this selling was because of the ongoing market selloff. Sometimes when you’re looking for buying opportunities, you see ideas it’s time to sell too.
I Did Far More Buying
I know, I left this out of the headline, but clickbait works! While doing the above selling, I bought shares of six different companies, and more of the Treasury bond ETFs that I own. In all, I have added about 2.6% to my stock and bond holdings, a good bit more than my selling.
This doesn’t even factor in the options corner of my portfolio, which I am using to generate additional cash, and hopefully find more attractive prices to buy shares. When we include those moves, that’s another ~1.5% of my portfolio that could eventually get rolled into shares of my favorite stocks.
About That Market Short…
I didn’t sell any of the indexes short; that’s a game that I am not comfortable playing. However, there is a way to create the same upside dynamic as shorting, while also capping potential losses at a set amount. In this case, I bought puts of an S&P 500 Index ETF. If the price of the index falls, the puts that I own will increase in value; if the market goes up, the value of the puts will go down.
Why I Did It
It’s probably more accurate to think about this as partial insurance than a big short. Not only are my losses capped to the amount I paid (about 0.5% of my portfolio value), but the upside would not offset the losses in my portfolio if we see a continued decline by the market. But I’m not trying to perfectly offset losses as much as generate extra cash to invest if it happens. I’m also not paying to borrow anyone’s shares to sell short, so no leverage or risk of margin calls.
Moreover, if these puts expire worthless in December, it will be because the market has moved up in value. If that happens, my portfolio’s gains will be far in excess of the cost of the puts. It probably also means we have moved on from the current turmoil. So I’m willing to trade a little bit of potential upside for more capital to deploy in the midst of a deeper market selloff.
What Are You Doing?
My investing strategy has gotten a little more sophisticated in recent years, but actually takes about the same amount of time and energy to manage. To some extent it’s working, with my portfolio declining less than the market’s selloff so far, in part because of my timing moving to more cash and bonds before the decline. Will it still earn market-beating returns during the next bull market? Time will see; either way I expect it will deliver on my financial needs with more certainty.
My framework is still built to serve my financial goals, and my actions are within those constructs. I hope and trust that you’re doing the same thing. Jeff and I would love to hear from you.
What are you doing right now to navigate the market, and exceed your own goals? Reply to this email or comment below and tell us!
You can do it,
Jason
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