Cure The Coronavirus Investor Sleeping Sickness

First, the typical warnings. This is not investment advice! I cannot predict the future! So please talk to your advisor…because he won’t take your calls after the 2nd quarter earnings season.

You’ve lived your adult life learning to ignore your retirement portfolio. Your steely resolve means that even a global pandemic won’t blow you off course. Sure, you 401K may go down, but it will come back again as it always does.

There’s safety in numbers! You won’t experience a once-in-a-century generational shock.

After the Great Depression, a whole generation adopted two words to live by, the first, “Capital”, whatever money you had, the second, “Preservation”, the desire to avoid the fate of those who lost it all in the 1930s and 40s.

Then the generational cycle turned again.

With the tech revolution in the 1980s, those words took on a new meaning. They caricatured the old fuddy-duddies keeping their money in passbook savings accounts, earning 5% interest. Peter Lynch and the Magellan Mutual Fund, earning 29.2% through his stewardship, ushered in a new world where risk = reward.

Peter Lynch never claimed to be a money maker. His process was simple; and he shared it openly. Pick an industry or company you believe will do well. Then invest in it. You don’t need an expert. The growth of that business will make you more money (assuming you diversify).

In the late 1980s and early 1990s thousands of mutual funds formed, allowing investors to invest in the growing tech industries. They too had their stars, like Bill Gross or Bill Miller.

Keep in mind, however, that without the real and powerful innovations in technology there would have been no Lynch, Gross or Miller! Only economic growth will send and keep stocks higher.

What of today?

You’ve heard it all before. The dollar will one day be worthless. Gold is the only safe investment. World War III is imminent. The U.S. is bankrupt. None of that happened. So whatever I say, you’re going to remember that the last time you put your money under your mattress, you regretted it.

For that reason, I’m not going down that road. I am only going to ask you a few questions.

What are the first principles of investing?

First, most people who call themselves investors will say you must have the mindset that everything you bought yesterday you would buy again today. Makes sense, right?

The same investors would say that if it isn’t worth owning today, then there is no reason to keep it for tomorrow.

Forget all the issues about changing your mind, or second guessing yourself. Assume you’re always clear-headed. You buy a stock when it looks like it will grow and you sell it when it doesn’t.

Let’s say you invested in the stock of a restaurant company. Company ‘R’ has been growing for 10 years. More restaurant locations. More revenues. Improving profit margins. Great management. Ideas that should put them ahead of their competitors. A near monopoly in a certain type of dining.

Ah! But you don’t invest in stocks, you invest in mutual funds, through your 401K. Your fund managers pick the stocks for you. That’s okay, you expect them to pick stocks like the stock ‘R’.

Although you’re worried about your money — who isn’t these days — I bet you have given much thought to where your money is sitting.

That’s my simple question: where is your money? And I’d follow up with, is it where you want it?

Do you need to be an expert to pull it out of a portfolio full of dying businesses?

Most restaurants in the world have shut down, including those from company ‘R’. Instead of opening restaurants, they’ll probably close them. They’re not viable at half capacity. More revenues? There are NO revenues. Profit margins? They’re operating at a loss. Debt? WAIT! We didn’t pay much attention to that before. They have lots of debt, which paid for those new locations. They are now dipping into their savings account to make the payments.

How many companies hit hard by the pandemic, their stocks or bonds, are in your 401k mutual funds? How many of them, at the current rate of business loss, could survive a year if no vaccine works in the next 12 months? How many of them have no debt? Or little debt?

So what am I saying? Pull your money out of any fund that has restaurants, airlines, hotels and other businesses where customers sit near each other?

Yes.

There are many good arguments about why that you shouldn’t sell a mutual fund and put your money in a post-pandemic portfolio. Billions and billions and billions have been spent — dare I say — brainwashing you to that effect. The question you have to ask yourself is would you rather err on the side of capital preservation or stay with the risk=reward group?

Numb Money

In my database of mutual fund holdings, I looked for the largest amount of stock, by value, in the Hotels, Restaurants & Leisure category.

As of 12/31/2019 that stock is Melco Resorts & Entertainment Ltd (MLCO). The American Funds Europacific Growth Fund (AEPGX) owns $764 million of it (the stock has since declined in value). Many funds in the American Funds family own this stock, totaling more than $1 billion.

In May, the stock has recovered from its fall. A news article reads,

“Macao (where the casinos are located) reported a 96.8% drop in gambling revenue in April, but the hope is that by the end of summer, resorts will be humming again.”

MLCO has $1.5 billion in cash. It has an annual interest expense of $320 million. Unlike many businesses in the category, it’s not strapped for cash. That said, it has almost $5 billion in debt. In 2019 it had roughly $400 million in net income.

Is MLCO a stock you pay into today? If your nephew approached you tomorrow about opening a restaurant next to a casino would you lend him money?

The point is that there are many companies in everyone’s 401K fund accounts that the investor wouldn’t hold if they took the time to look. American Funds may also question such holdings, but how is it going to sell a $1 billion of this stock without sending the price lower? Further, it’s job is to invest in the best stocks in the category and, relatively speaking, MLCO is probably better than the others.

The fact is, most mutual funds do not have a fiduciary duty to run their portfolios for the shareholder’s capital preservation — unless they say so. The goal of the Europacific fund is:

“A diversified approach to international growth. Invests in attractively valued companies in developed and emerging markets that are positioned to benefit from innovation, global economic growth, increasing consumer demand or a turnaround in business conditions.”

The fund has $141 billion in assets! Last month, less than $1 billion, or 0.6% was remove by shareholders. Keep in mind, I only picked this fund because MLCO came at the top of my holdings list. The question of how much of your money is in hotels is not related to the fund manager, in this case, American Funds.

Mutual funds hold $43 billion in Hotels, Restaurants & Leisure stock. How many shareholders are paying attention? Almost none. They wouldn’t invest in a mutual fund in the first place if they wanted to think about their investments.

As the Romans said, caveat emptor. Only you can decide if it’s safe. If you’re going to act, the time is now. Unless you want to get trampled running for the exits as your great-great grandparents did.