OUTLOOK ON 2021
So this is it, a late review of 2020. I wanted to wait a little before diving in the usual “what happened last year” post.
I guess we all were affected, more or less, by the same macro issue, COVID19. This is something that technically united the whole world, despite the fact that probably, given the choice, we all would have chosen a different “mean of unification”, so to speak.
Trump has not been elected president for the second mandate, Brexit was finally completed (or should I say, it finally started) and I cannot think of other major events that characterised this year.
Stock market took a major beating in March, recovered in a spectacular way, and stressed once more the fact that the world of finance is quite distant from the real world. Main Street vs. Wall Street, 2020 surely increased the distance between the two.
At the end of 2019 I was casting doubts on the valuations that we were seeing, it seemed to me that markets were quite stretched and I thought that 2020 could see a bit of a cool-down under the financial and economic point of view. Well nothing like that happened, there was a crash, but it was quickly recovered.
At the end of 2020 the situation I think is much worse than what it was before, the stock markets (not all of them) have surpassed pre-covid levels by the end of the year, there is a great euphoria that sweeps through the markets, every little piece of good news is an excuse for yet another rally, while bad news are either read as “potentially we can do better later” or simply they are ignored.
I do not trust this situation at all, I do not see a potential “great post-covid recovery” that the markets seem to price and what I see is a quite foolish exuberance fuelled by several factors that are getting investors and “new investors” to seek returns in stocks.
Under the economic point of view we are now in a very low interest rate scenario, coupled with abundance of raw materials, important oil stocks and high unemployment. Clearly a deflationary environment, that will probably mean that stock markets have still fuel to run even higher.
We need to go back to last century in the 30’s to see rates so low.
To me, this means only one thing. We are approaching the end of an economic macro-cycle, if economic theory as we know it is still “sound”, then we need to expect some pick up in inflation which will lead to a rise in interest rates.
This is how economics works, it’s nothing special, we live though a series of macro and micro cycles, all of them are necessary.
In a rising inflation scenario interest rates have to go up, and with them stock markets are likely to go down as the investors will be given the choice of “risk free” investments that are returning more and more.
Are we going to see this happening in 2020? My gut feeling is that is not that certain, there is still steam for the bull market to run, and as I mentioned the deflationary forces are much stronger than the inflationary ones.
On the other side, given the quickness of how finance is moving these days I would not be surprised if we found ourselves in a bear market in a matter of weeks, if not days.
If in 2020 I was cautious, 2021 will see me being even more “worried” at the state of the markets.
I’ve already started in December 2020, but I will continue not to buy additional stocks unless assigned through put options that expire ITM. The reason for this choice is twofold:
- As I mentioned I see a very high market and therefore valuations on stocks that I am interested in are very high, apart from few cases that I am monitoring.
- Last year I expected a “negative” year, but did nothing to second this feeling. I was reinvesting money as soon as I got it available and by the time March came in, I had very little cash to deploy. This year I am going to be patient (if I can), and reduce my buy/sell activity.
I am going to go back selling PUT options on stocks that I do now own or stocks that I own but with strikes below my average prices. Options helped me a lot in the past to beef up gains and revenue, but I am increasing the study of some basic fundamentals in order to start selling monthly/weekly puts and create a “base income” of at least 200 euro per month.
I will still sell CALL options very far OTM in order to increase revenue from the invested lots, but I need to be careful with these operations because when the trade goes against me it means losing the stocks (and dividends) for a small premium.
Stock-wise I am still looking at diminishing the number of holdings, I still have too many and some of them are not necessary at all, better reinvest in bigger/better companies even if this means increasing the average price.
Dividends: 14.167 Euro
It went rather well considering that I’ve got lots of suspensions/cuts/cancellations. In 2019 the total was 14.692 Euro, so I’ve lost only 4% this year. Who would have thought!
Options: 2635 Euro
Options did pretty well, mostly thanks to a CALL on SBUX that I saw exercised before expiry on a dividend and a massive rally that the stock did that day. Because I was rolling this options I had a lot of “value” that become real the moment it was closed. Anyhow, no complaints here, it’s all part of the game. (vs. 2019 +74%)
Total Return 2020 vs. 2019 : -7,11%
I did mention that the markets recovered and even surpassed 2019 levels, the issue here is the exchange rate of the Euro, getting stronger and stronger by year end. X-rates losses amount to 7.60%, if I was to create a constant X-rate figure it would be positive.
CNAGR (Compound Net Annual Growth Rate)
Lower than 2019, but still positive. This metric is NET (or at least “as net as it gets”), I consider all trading costs, also future, taxes, accountant expenses and trade costs. This is a metric that I track once an year because it’s not my main goal. I don’t care if this is high or low, Total Return (in this case Net) it’s not a target.
In case you gave me 10.000 Euro to manage 6 years ago you would have back today 11.483 Euro, net.
So what is the point of this portfolio? as a return this is not that enticing at all…
Well, the main target is the creation of income through dividends and options. This is a surrogate to a pension fund, technically I should not sell the stocks that I buy, I should just accumulate them. The point is not that I close everything and walk off with the money, the point is preservation of capital from inflation (mission accomplished so far) plus creation of a monthly stream of cash that at the moment is reinvested in the fund, but tomorrow will probably be used to live.
All in all 2020 was not a great year for the LH Portfolio. One of the key metrics (dividend growth) was botched, albeit just slightly. It meant that the constituents of the portfolio were not that safe, did not have a great dividend policy and were not as stable as they seemed to be when I did my due diligence on them.
Let’s see what 2021 has in store for us!