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My Investments in Hard Times
Hello everyone! With the market falling, I was asked to provide an additional review of what is happening and my next steps.
First of all, I would like to say that we are currently witnessing a very common correction on the market. If we analyze history, it looks like this.
— Corrections of more than 10% occur more often than once a year (more precisely, 1.3 times).
— Corrections of more than 20% occur approximately once every 1.5 years.
— Corrections of 30% or more occur approximately once every 2.5 years.
— Super corrections of more than 50% have only occurred twice in the last 20 years (2008 and 2022). once every 10 years
In the photo is a table with corrections for the Russian market, taken from Timofey. So what we see on the market today (27% correction) happens very often, about once every 2.5 years. There is nothing surprising about this.
Some may say that interest rates have risen to a record level, but this has never happened before. But during the next revision, an unprecedented event occurred. For example, the 31% market correction in 2004, the Yukos case - this has never happened. It is like closing Lukoil. Alternatively, in September-October 2022, there was a 29% correction and mobilization, which is also an unprecedented phenomenon. So, a 30% correction does not happen like that and is almost always accompanied by negative consequences.
So my stock market strategy has not changed and will not change in the future. I buy on the last working day of each month, regardless of market conditions. When the market gets deeper, you buy more, and when the market starts to rise, you buy less. I select stocks from the Moscow Exchange index, analyzing the fundamental indicators of the company: PER, stock price, profitability, debt, dividends, development prospects, subjective profit forecasts, etc.
Recently, due to the sharp decline in stock prices after the break, I started buying shares of Bashneft, Pref., Magnit, etc. I also fly small planes, but I do not recommend repeating this. It is dangerous for the longevity of your investment portfolio. So, just for fun, we rent out all the shares of developers with big plans and strategies at a very cheap price.
If there is a strong correction, we buy additional shares outside the strategy range for every 15% decline. I already bought on July 16, when the correction was about 15% from the May high. Now the correction is approaching 30% and I want to buy too.
The situation with bonds is more complicated. My global bond strategy is to buy short-term bonds with a maturity of up to one year, when long-term OFZ with a fixed coupon yield less than 10%, in order to create liquidity reserves for buying shares during a crisis. If the yield on long-term OFZ exceeds 10%, we move on to buying long-term OFZ. Details in the photo.
Using this strategy, we switched to buying long-term OFZs with a fixed coupon in October 2023. At that time, the long-term yield on OFZs reached 12.6%. Since then, I have continued to buy long OFZs, and their yield is currently 15.1% according to the yield index of 10-year OFZs of the Russian Federation. There are no positive signals in this sector of my investments, but the overvaluation of OFZ positions has become significant, which negatively affects the yield of the entire portfolio. However, high-yield coupons have offset some of the overvaluation.
At this point, it's a revaluation, not a loss. Even though the situation has worsened, it couldn't get out of control. The baseline scenario for me is:
1. Normalization of inflation and reversal of central bank interest rates within 1-2 years.
2. If you stop buying OFZs and switch to short companies, you will return to the area of OFZ yields below 10% (see figure).
3. If you start selling long positions on OFZ and continue shorting the company, your long yield on OFZ will decrease with a fixed coupon of less than 7% in the sell zone (see figure).
In my opinion, the negative scenario is hyperinflation, when inflation gets out of the control of the central bank. In this case, revaluation of OFZ is very important. For example, with inflation of 50% per year, the purchase price of OFZ with a fixed coupon will fall to 15% of the average nominal value. This is an additional 70% lower than the current price.
My actions in this case are the so-called Portfolio Vaccination - Reinvest incoming coupons into OFZs that have fallen to the ground. In this case, the number of OFZs bought with coupons is large due to the low price. Then wait until the hyperinflation situation normalizes over several years. When inflation normalizes, OFZs will return to normal prices, and given the large number of OFZs bought during the vaccination period, theoretically the revaluation of OFZs will compensate for some of the losses caused by hyperinflation.
At the moment, the portfolio yield has fallen to 9% per annum, so it is still far from negative values, which they will be in September 2022. The yield is still higher than the index at 8%. This is much better than expected. According to my strategy, the portfolio volatility is higher than the index, so when the market falls, the portfolio yield should be lower than the index yield. Let me remind you that when the market was growing, the yield of my portfolio exceeded the index by 4%.
But the portfolio profitability itself is secondary for me. More important indicators are average monthly dividends and coupon income. This year, the figure turned out to be 1.5 times higher than I planned due to high interest rates and the withdrawal of dividends by many companies. The ratio of shares and bonds in the portfolio is still 70/30. The figure below shows more detailed portfolio indicators.