It’s often hard to buy stocks after a selloff when stocks are cheap. Since Tony Mitchell started his Internet fund at Marketocracy 17 years ago, he has navigated 2 market crashes and outperformed the top U.S. equity mutual fund manager for the past 10 years. Now, after two days of unprecedented declines, Tony is buying Micron and IBM today while getting ready to add to Facebook, Alibaba, and Cisco.
Ken Kam: Did you expect this pullback and why do you think it is over?
Tony Mitchell: I think most serious investors expected it, but many also suffered from “FOMO” the “fear of missing out”, because the market has been so hot. I’ve been expecting it for a few months and the market actually wore on me, starting to make me think that maybe I was wrong, but here it is. Tuesday will start off as another down day, but I believe there is a good chance that we see a reversal on Tuesday, and the market moves higher Wednesday & Thursday. Nobody can time the bottom perfectly but I believe it is time to put cash to work on bargains that the market has created.
I follow a number of analysts and consider what they are seeing and sharing if I feel that they have a good basis for their case. There are two whose work I’ve come to respect, that have made statements in the past week supporting my decision to put my cash to work now.
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First, I have to give credit to Tony Dwyer, the Chief Market Strategist from Canaccord Genuity, for his call of this pullback on Jan. 30 on CNBC, citing a number of indicators that provided a strong basis for an imminent pullback. Of more importance is that along with his call for this pullback, he also maintains a year end target on the S&P of 3100, and has said that the pullbacks we will see this year, will happen so fast that investors will not have time to react to them.
Second, on Friday, Feb. 2, on CNBC, Carter Worth, a top technical analyst, showed us 3 trend lines to watch and then projected that if we had a full pullback through the first two, the trend along the bottom would put us at 2650 in the S&P, and we closed Monday at 2649.
Kam: 3100 would be up 17 percent from where the S&P closed on Monday at 2648. Do you really think that we will be there by the end of the year?
Mitchell: I do. I think that there is panic and program trading that has taken us down so far, so fast over the last two days, but I see it as an opportunity and believe that we will end the year higher and there are many reasons supporting it including:
- The Tax Cuts are providing tail winds to company earnings
- Wages are increasing and companies are handing out bonuses, which will help to drive growth
- Individual’s tax cuts will add to their disposable income and drive growth further
- There are no good alternatives to investing in equities right now:
1.Cash in savings or money market funds will not keep up with inflation
2.Interest rates are rising, so bond values are falling
3.Real Estate prices are high - Every week there is new money coming into the market that needs to be invested into 401Ks
Kam: So what are you buying now?
Mitchell: I’m buying Micron and adding to IBM, which is a position that I just recently started. Both have reasonable PE valuations and are at least 15 percent off their 52 week highs. I also have my eye on Facebook, Alibaba, and Cisco.
Facebook held up pretty good on Friday, but broke down on Monday providing an opportunity to get in again around $180.
Alibaba has given back more, close to 15 percent down from its high of $206, and can probably be bought on Tuesday morning under $180.
Cisco had finally broke out, and held up pretty nicely on Friday, but is giving us an opportunity to get it close to those levels that it broke out at, and it offers a 3 percent dividend.
Kam: What will you do if you are wrong and the market continues to decline this week?
Mitchell: I’ve learned over the long term that just like there are some stocks that you miss on the way up, after the market falls is not the time to sell.
I’m a long term investor. I expect short term volatility and try to take advantage of it when the reward looks greater than the risk. But, I believe that it is time to buy now, and will put the cash that I’ve raised from trimming winners back to work.
Kam: Is there anything else that you would recommend for a conservative investor right now after the two days we just had?
Mitchell: Your question brings to mind the advice I just shared with a family member. She had a small 401k rollover account that she needed to invest and while she would love to see it grow, she certainly doesn’t want to lose any of it.
Since her account was smaller than our 20,000 minimum, we set her account up elsewhere and transferred the funds in early December. But I told her then that we weren’t in a hurry to invest it as I had expected a pullback in the market. Yes, she lost out on some returns by waiting, but most of those gains would have been erased in the last two days. Today we put her cash to work and I recommended that she split it equally between the IBB (Biotech ETF), the XLF (Financial ETF), and the XLK (Technology ETF).
I like these three sectors to all grow in 2018 and beyond, and while greater growth could be achieved from picking individual stocks, she wouldn’t be able to purchase enough stocks to be diversified, so by utilizing these ETFs, she will be somewhat diversified, yet have growth opportunity and pick up some dividends along the way.
This is not to say that I believe in passive management, as there will be a time to rotate out of these sectors, which requires active management. However for the short term, and a small account, this is a good and safe start for her to learn and earn.
My Take: Even after yesterday’s 1,175 point drop in the Dow, Tony’s Internet fund is still up about 7 percent in 2018, while the S&P is now negative on the year. His fund finished 2017 up 29.8 percent outperforming the S&P by 8 percent. In 2016, his Internet fund finished up 26.4 percent outperforming the S&P by 14.4 percent, but more important is Tony’s long term record.
Over the last 10 years, Tony’s Internet fund did better than the top U.S. Equity fund manager and would rank in the top quartile for the last 1, 3, and 5 year periods.
Tony’s internet fund is not a mutual fund. It is an investment option for clients of our separately managed account program. For information about investing with Tony, click here.
I believe people should have to prove themselves before they can manage other people’s money and the best evidence of investment skill is a track record. For more information contact me.
Date: Feb 06, 2018