Stock Investing and Recession

[Mike Parrish]

I took a simpler approach after working at the Chicago Mercantile Exchange and watching the ever present financial shenanigans.

Stock index funds with very low management fees over time are hard to beat.

I have a bunch of startup stock from my last company that I am loathe to cashout until the market rebounds.
We have a target exit price but the waiting is killing me.

[jross]

I was heavy on retirement index funds for 6 years.  Put 10% annual in like momma said, set it, forgot it, and enjoyed 10% compounding interest returns.  The government printed money for my company's sector and I went Enron style for a while.  I've mostly been going long on self-picked companies since that time.  

Since starting 401K equity investing in 2004, my total portfolio paper gains have returned 390%.  An alternative history that invested only in the S&P 500 would have returned 82%.  An alternative investment of Berkshire Hathaway would have returned 167%.  I've lost money in 4 years, one better than the S&P and one worse than Berkshire Hathaway. 

There is a case to be made for self management of funds...  no management expense beyond my time... holdings in a 401K brokerage account that allows buy, sell, cash reserve, etc. and all the things with exception of calls/puts for options.

I've made costly mistakes and my main regret is capping annual investment at 10% rather than 30%.

Edited February 15, 2023 by jross

[LJB]

i hate coming into this thread...

it makes me feel like i will never be an adult...

ever...

[jross]

Work hard, invest smart, and drudge through the prime of your life for pennies to compound so one day you might afford eggs.



Returns can sound impressive but 1000% gain on zero is zero.

[LJB]

when i was racing motorcycles anytime someone would ask me how much i spent on it the answer was always the same...

all of it...

then i started sending two kids all over the planet to wrestle...

wanna know how much i spend on that?

all of it...

[jross]

Experiences are worth every penny.

[LJB]

6 minutes ago, jross said:

Experiences are worth every penny.

 

 

i typically go all the way...

[mspart]

When is the next recession coming?

mspart

[jross]

Don't listen to me.

I was convinced it would happen with reopening in late spring/summer of 2022.  The drop began in Jan when I was planning to exit fully in Feb.  But when everyone has the same thoughts... (bag holder) 

The simplest signal is that the S&P chart does not reflect the economy, 2023 earnings, and future growth estimates.  With the exception of a few months in 2020, the growth rate is linear since 2009.  

2023 is unclear and I've moved 25% from equity into fast maturing treasury bills this week.  I will move up to another 50% soon.  I'm positioning for a downswing to 3600 .SPX and looking for better prices on select companies.  10-30%, even 50% drop is predicted, along with 20% gains by different experts.  Its about a 60:40 ratio of expert predicted drop vs rise.  I'm sure to be wrong.  If I'm wrong and it keeps growing 40% every 3 years, .SPX will be at 5800 by 2026.  It's going to get to 5800 within 10 years anyway because the market always moves past its tumbles.  The ichimoku cloud chart is bullish on .SPX... I'm not.

Edited February 16, 2023 by jross

[mspart]

I read on Yahoo, that the recession will come later in the year.    But today was not a good day, that's for sure.

mspart

[jross]

83% cash and treasury bills now.  Hope I'm right.

[El Luchador]

I don't understand how in a time of massive inflation the market can be losing value.  Real world inflation in my life is much worse than the government narrative. I can't think of one thing that has only gone up in price the 8% they give credit for. Maybe it's a compounding number?  Food, fuel, transportation and transportation related goods and services, energy, and housing all have increased more than the 8%. Why doesn't the market reflect these increases?

[jross]

In my personal life, I pay off high rate credit cards every month.  I'm good with paying my low rate mortgage over several years.  I can grow my net income better when my debts have low interest rates.

The economy has high inflation.  The Fed raises interest rates to lower inflation.  Higher interest rates lead to more expensive loans.  Companies take less loans.  Companies also have debts coming due that they have to refinance at the latest high rates.  This leads to less growth and in a future looking stock market, less value.  Unprofitable companies are in a bad spot where as profitable companies with cash flow will weather the storm.  When interest rates are eventually reduced, the market should take off.

There are other factors that impact sectors...

[jross]

I saw information today that is different than a short while back...
https://www.fidelity.com/news/article/us-markets/202302170104RTRSNEWSCOMBINED_KBN2UR0AC-OUSBS_1

Quote

Only 24% of global fund managers now expect a recession, down from 77% in November, a recent survey by BofA Global Research showed.

 

[Mike Parrish]

1 hour ago, jross said:

In my personal life, I pay off high rate credit cards every month.  I'm good with paying my low rate mortgage over several years.  I can grow my net income better when my debts have low interest rates.

The economy has high inflation.  The Fed raises interest rates to lower inflation.  Higher interest rates lead to more expensive loans.  Companies take less loans.  Companies also have debts coming due that they have to refinance at the latest high rates.  This leads to less growth and in a future looking stock market, less value.  Unprofitable companies are in a bad spot where as profitable companies with cash flow will weather the storm.  When interest rates are eventually reduced, the market should take off.

There are other factors that impact sectors...

Also, companies with large cash reserves typically go on M&A sprees during these times.

[Wrestleknownothing]

On 2/13/2023 at 2:57 PM, jross said:

Am I looking at treasury bill investments in 2023 correctly where the return in 4 months is guaranteed at nearly 4.8%?  Where in theory one can buy 4m maturity bills three times a year and yield 14.4%?  This seems like a no brainer in this market uncertainty.  

Those yields are annualized, not period yields. So the 4 month return is 4.8/3=1.6%

[Wrestleknownothing]

On 2/14/2023 at 3:02 PM, Mike Parrish said:

I took a simpler approach after working at the Chicago Mercantile Exchange and watching the ever present financial shenanigans.

Stock index funds with very low management fees over time are hard to beat.

I have a bunch of startup stock from my last company that I am loathe to cashout until the market rebounds.
We have a target exit price but the waiting is killing me.

@jross this is very sound advice.

Returns are unpredictable, but fees are not.

Which leads to the mutual fund recommendations above. They are all very high fee funds that have performed anywhere from meh, to very poorly. Fees range from 0.6% to over 2% for some of these. There is no coherent strategy involved either. Many are asset allocation funds that have large bond holding along with stock holdings, yet the suggestion is to hold some bond funds to get bond exposure. I wound not accept any advice you find here. Including my own.

[jross]

My 401k brokerage has no fees to buy and sell.  No taxes on gains and no write off for loss.  

[Wrestleknownothing]

1 minute ago, jross said:

My 401k brokerage has no fees to buy and sell.  No taxes on gains and no write off for loss.  

Those are management fees, not commissions. They get taken out of the assets of the fund.

[jross]

The market is getting interesting.  Some silicon valley companies cannot pay their employees this month due to the silicon valley bank dilemma.

"Our money is gone."

https://www.businessinsider.com/startups-silicon-valley-bank-worried-wont-pay-employees-next-week-2023-3

[El Luchador]

12 minutes ago, jross said:

The market is getting interesting.  Some silicon valley companies cannot pay their employees this month due to the silicon valley bank dilemma.

"Our money is gone."

https://www.businessinsider.com/startups-silicon-valley-bank-worried-wont-pay-employees-next-week-2023-3

But how's your social score? 

[jross]

1 hour ago, El Luchador said:

But how's your social score? 

https://en.wikipedia.org/wiki/Nosedive_(Black_Mirror)

[Wrestleknownothing]

On 3/11/2023 at 1:47 PM, jross said:

The market is getting interesting.  Some silicon valley companies cannot pay their employees this month due to the silicon valley bank dilemma.

"Our money is gone."

https://www.businessinsider.com/startups-silicon-valley-bank-worried-wont-pay-employees-next-week-2023-3

I cannot read the article as it is behind the paywall so it is difficult to assess your quote, but their money is not gone. SVB has a classic maturity mismatch (the definition of a bank), took a lose selling some long term bonds and foolishly tried a recapitalization a day after Silvergate announced their own problems. SVB depositors panicked and asked for too much of their deposits back. 

[jross]

Now that the government is doing its thing... the depositors will be okay.  This was the sentiment on Friday.  Monday won't be as bad as it looked...
---------------------------------------------------------------------------------------------------------------------
 

Startup founders still reeling from Silicon Valley Bank's implosion have something new to stress about: whether they'll be able to access enough money to cut employee paychecks next week.

The number of growth stage companies that had their cash at SVB is huge," tweeted founder Nikita Bier. "Making payroll next week is going to be a shitshow."

SVB is the bank of choice for nearly half of all US venture-backed startups, according to its website, and its recent implosion has left these startups scrambling to cover their most pressing expenses.

Garry Tan, CEO of storied startup accelerator Y Combinator, wrote on Twitter that more than 30% of YC companies exposed through SVB can't make payroll in the next 30 days and urged startup founders to reach out to elected officials for help. He added to CNBC that about 1,000 startups YC has invested in will be affected by SVB's fallout. 

"The last 24 hours have been crazy. Every venture capitalists' cell phone is being blown up by CEOs asking for advice trying to figure out Monday's payroll which is the most immediate problem," Sam Lessin, a partner at Slow Ventures, said on CNBC on Friday. "One founder I was talking to is going to cover payroll personally on Monday and figure it out from there," Lessin said.

"Startups who couldn't pull out cash from SVB in time have immediate cash needs - payroll, vendors, critical infrastructure payments," tweeted Afore Capital founder Anamitra Banerji.

The Rippling Effect
Even startups that don't personally bank with SVB are feeling the effects of the bank's troubles, as many realized today that payroll processors like Rippling use SVB to issue paychecks to employees. One founder, Alex Meshkin of healthtech startup Flow Health, posted a message to employees on social media that detailed the conundrum the startup was facing due to Rippling's relationship with the bank.

"This is dumpster fire," he wrote on Twitter.

Flow Health employees were supposed to be paid today but weren't, Meshkin told Insider. The money to be used in payroll was debited from the company's Wells Fargo account on Wednesday, he said, but did not get disbursed on Friday as scheduled. Meshkin sent an announcement to Flow Health's 1,000 employees via Slack. He said that some had refused to report to work because they hadn't been paid.

"For all intents and purposes, our money's gone," he said.  "A lot of people live paycheck to paycheck. It's a really tough situation. I truly believe there's going to be mass layoffs across Silicon Valley on Monday."

Rippling, for its part, said it was switching its banking relationship from SVB to JPMorgan, with founder Parker Conrad tweeting on Friday that his "top priority is to get our customers' employees paid as soon as we possibly can, and we're working diligently toward that on all available channels, and trying to learn what the FDIC takeover means for today's payments."

"[Rippling] is saying payrolls are going to happen today," Meshkin said. "It's not. They're full of shit." 

Ashley Tyrner, the founder of FarmboxRx, said she's spent the last 24 hours trying and failing to access her SVB account to pay employees. Thankfully, she also banks with First Republic and Bank of America, so she is able to pay her employees. She's even willing to take a cut of her own salary to pay her staff, she told Insider. However, three of her friends who are also startup founders who have all of their money in SVB accounts are worried about paying their employees, Tyrner told Insider. 

VCs weigh in
Publicly, many investors have been outspoken on the topic.

"This is DEFCON 1," tweeted angel investor Jason Calacanis. "Lots of startups are missing payroll in 2-4 weeks if a) Silicon Valley Bank doesn't have the deposits b) SVB doesn't get sold or c) SVB isn't rescued."

But privately, some investors admit that the uncertainty is making it difficult to provide founders with concrete guidance. Many are still hoping, perhaps naively, that the issue will be resolved by Monday to allow cash withdrawals, said one startup investor who asked not to be identified discussing a sensitive topic.

In addition to well-meaning investors, some HR and payroll companies are swooping in to rescue affected startups, offering everything from discounts to short-term financing.

"If you're a startup founder dealing with this, I'm here to help any way I can," Ayush Sharma, founder and CEO of payroll and compliance startup Warp, tweeted. "We've decided to discount @joinwarp payroll to any startups impacted."

[mspart]

With the Signature bank failure as well as SVB, and First Republic stock price losing 73%, can we honestly say all is well.  And let's not forget the utter tanking of FTX.   Everyone figured that was an isolated incident.   But now there seems to be a wave brewing. 

This seems eerily similar to what I was hearing in 2008.   Market is up today but I am not so sure it will be for long.  The recession may be here sooner than everyone thought.  

mspart