Highly regarded billionaire investor Bill Ackman recently tweeted Russia's attack on Ukraine means World War 3 has 'likely already started.' He went on to write:
We are in the early innings of Putin's global aspirations. With each 'victory,' he is emboldened to take more. He is testing us, and we are failing the test each time.
Finally, he stated that the conflict in Ukraine is giving him nightmares about another world war potentially breaking out and made the connection to his nightmares in January 2020 of a global pandemic breaking out.
Certainly the markets are concerned about what is going on. For example, precious metals (GLD) (SLV) (GDX) and energy (WTI) (GUSH) (XOM) stocks are soaring while high-growth tech (ARKK) and European stocks (FDD) are crashing.
Should investors hit the panic button, sell all of their stocks, hunker down, and just buy gold and oil or is there another path forward? In this article, we detail our strategy during these tumultuous times and also offer some of our top high yielding picks of the moment.
If we knew with absolute certainty that the markets would continue to head south and that gold and oil would keep soaring, we would certainly hit the panic button and prepare for Armageddon.
However, we in fact do not know how the market or even subsectors of the market will behave next week, next month, or even next year. The factors involved are far too vast and unpredictable to be able to consistently time the market for profit. To do so would require near complete real time omniscience of geopolitical, environmental, and biological events coupled with a mastery of behavioral economics. While we hate to disappoint our readers - and especially our members at High Yield Investor - the truth is that we are not there yet.
In fact, even if we did have a mastery of the fundamentals and where they were headed, that would be no guarantee of profits. As John Maynard Keynes once said:
the markets can remain irrational longer than you can remain solvent.
and legendary investor Howard Marks pointed out that:
Going to cash under almost all circumstances is stupid because among other things when you go to cash you have to be right – right away. Because if you go to cash and prices keep going up for a while, as they invariably will, and returns continue to be positive, you fall so bar behind by being in cash that you may even jeopardize your business.
Going all-in on cash (or gold or oil or any other single commodity or sector) in an attempt to maximize total returns, therefore, is an irrational thing to do and over time will prove to be a fool's errand.
What does this mean? It simply means that rather than panicking because a billionaire hedge fund manager said World War 3 has likely already started, throwing out previous strategy to the wind, and going "all-in" on a war and recession proof portfolio, we prefer to keep calm and let the dividends flow.
Given that we cannot rationally predict how markets or individual commodities will perform in the near term, the only rational course of action is simply to maximize time in the market with a view to the long-term.
What this means for our portfolio at High Yield Investor is that our aim is to focus on buying wherever value and quality meet and not worrying about how those investments perform over the next week or month or even year.
As Warren Buffett said:
Whenever you find something of value to buy ... the time to buy it is then and not wait for it to maybe become a little bit cheaper down the road.
By remaining diversified across sectors and opportunistically recycling and rebalancing between them as global macroeconomic and geopolitical events fluctuate, we can let volatility serve us and generate outsized long-term risk-adjusted returns. In the meantime, we will also be collecting a fat 5%-6% weighted average income yield from our portfolio that provides us a steady stream of fresh capital to deploy and/or to fund our living expenses, thereby rendering market volatility relatively a moot point. If you never have to sell your stocks, soaring market volatility does not spell risk. Rather, it spells opportunity. This is the beauty of being a high yield investor.
While this sounds great in theory, how does it work in practice?
It means that we keep our portfolio well-diversified with an overweight emphasis on investment grade and defensive businesses that generate stable cash-flows. In turn, this makes them much easier to understand and value which also helps us to minimize our losers. It also contributes to a more stable income stream, thereby helping us sleep better at night when the world is tossed into chaos.
While we currently hold over 30 high conviction investments after successfully exiting many in recent months, we will discuss a few of our past and present top picks here to give you some ideas to consider.
Our utilities & infrastructure businesses (XLU) have included the likes of Brookfield Asset Management (BAM), South Jersey Industries (SJI), and FirstEnergy (FE) in the past, all of which have proven to be big winners for us. Moving forward, one of our top picks in the space is ATCO (OTCPK:ACLLF) and we could see ourselves buying Blackstone (BX) if its share price continues its current decline.
We have made several successful investments in insurance businesses like Universal Insurance Holdings (UVE) as well as in Banks like Westpac (WBK), both of which we have since exited at large gains. Today, one of our top picks in Financial Services is Virtu Financial (VIRT) - a high frequency trader - which we were buying heavily on dips into the low $20s last year and have since made a hefty profit on. However, with volatility soaring, we believe there is still considerable upside remaining.
While our tech exposure is currently small, we made a lot of money in 2021 off of our investment in SuRo Capital (SSSS) thanks to its successful exits from Palantir Technologies (PLTR), Coursera (COUR), and several other high growth tech stocks.
We are also finding exciting and deeply undervalued high yield opportunities in the consumer goods (XLP) (XLY), telecommunications (IYZ), and industrials (VIS) spaces and are also buying the dip in investment grade high yield European stalwarts like Enel SpA (OTCPK:ENLAY).
While war involving a nuclear power is always scary, especially when tensions are soaring between the two leading nuclear powers in the world, it is also important to keep a clear head.
Given that we cannot possibly accurately predict the future consistently, it is best to keep a diversified portfolio that focuses on investment grade high quality businesses that trade at discounted valuations. If they generate consistent cash flows and pay out reliable dividends, even better.
By taking this approach in combination with tactical recycling and rebalancing of capital at High Yield Investor, we have been blessed with strong performance to date:
|HYI Core Portfolio||54.80%|
|S&P 500 (SPY)||21.70%|
While at the moment our energy and materials investments are booming, our steady flow of dividend income and tactical capital recycling is enabling us to capitalize on deeply undervalued opportunities in Europe and beyond.
If you want access to our Portfolio that has crushed the market since inception and all our current Top Picks, join us for a 2-week free trial at High Yield Investor.
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This article was written by
Samuel Smith is Vice President at Leonberg Capital and manages the High Yield Investor Seeking Alpha Marketplace Service.
Samuel is a Professional Engineer and Project Management Professional by training and holds a B.S. in Civil Engineering and Mathematics from the United States Military Academy at West Point. He is a former Army officer, land development project engineer, and lead investment analyst at Sure Dividend.
Disclosure: I/we have a beneficial long position in the shares of GLD, SLV, GOLD, ENLAY, ET, EPD, VIRT, ACLLF, WPC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.