I’m moving more defensive

I’m moving more defensive

The equity markets have had a stellar nine-year run. I’ve benefited from this very handsomely. However this can’t last. That’s why I’m moving more defensive.
Markets have been extremely kind to me over the last 10 years. After what was a horror 2008 and 2009 for me I have made hay while the sun shines during this long bull-market.

I have been lucky enough to rack up a roster of positions which are up multiples of capital invested.  There are almost 10 companies in which I’ve invested that have doubled or tripled the capital base during the school market.

My triples include company such as Cochlear, Commonwealth Bank and Invocare.  Doubles include Mercadolibre, AliBaba, Atlassian, CME, Visa, MasterCard and Westpac. Of course, this doesn’t include many others that are up 50% or more in this time frame

Things of been so good lately that even my almost 2.25 year old Project $1M is returning close 20% annualized, a nice outperformance over the S&P 500. Of course, all good things eventually come to an end, and I believe this strong run of gains will also.

I am a long term investor, so I don’t believe in selling down, no matter how much my businesses have appreciated, provided the underlying competitive advantages of these businesses are still in tact.There is also a real replacement problem in finding suitable businesses of high enough quality, and I strive to ensure all of my positions are of particularly high quality, such that selling them would create other headaches for me.

This doesn’t mean that I won’t be moving to a more conservative stance though. I had been adopting a modest amount of gearing in my portfolio over the last few years in the expectation that the stocks I was acquiring were fairly priced not to mention that interest rates were low. I also wanted to aggressively position more of my holdings in growth.

In the space of a few years, there is a distinct reversal in both low rates and reasonable valuations. With solid economic growth across the globe, an uptick in inflation is likely only a matter of time (I still expect that this should be fairly moderate though). Rates are now on the way up, and any valuation discount that was present in the market is now gone.

I’m taking advantage of my recent exit from Aconex to pay down some of my accumulated margin debt across my equity portfolios and move to a more defensive position. I still don’t see any evidence of really outrageous valuations in my portfolio today. However the low volatility, constant move up in the markets and lack of any notable correction over the last couple of years has me operating with a more defensive mindset.

I also mentioned recently that there is an over bullishness that’s apparent in aspects of the market, with certain hedge fund participants in particular taking  highly leveraged steaks in market positions. What this could mean is that any correction is amplified as stop losses and leverage is unwound in the market.

I want to be in the position of taking advantage of this distress and being a buyer of last resort to market participants. This is nothing better than being the buyer of a high-quality business from a forced seller. In order to be able to capitalize, I need to ensure that I have surplus cash reserves and that my own leverage is kept at a minimum.

I still have a high conviction outlook on my own core positions that are being driven by long term tailwinds. I believe the business outlook for all of my positions continues to be positive, but how these positions are valued  at any point in time by the market will remain uncertain.

Of course, when we do get the next downturn remains uncertain, but it’s my view that everyday that progresses without the semblance of even modest correction, brings us closer to a larger decline. And my view is that the next decline will be a fairly steep one as a result of some of the market factors I have described. I want to be well positioned for this when it hits.


  1. GFI,

    You have any particular stocks you recommend for the pullback??


  2. Hi Money Hungry, I would like just top up my holdings of MA, V FB and others. It would take a pullback of 20-30% to get me interested though.

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