“Everybody has a plan until they get punched in the mouth.” —Mike Tyson
By now, everyone has seen the TMZ video clip of Iron Mike correcting the behavior of an intoxicated airplane passenger who repeatedly provoked the former heavyweight boxing champion. Violence is not the solution we should strive for. Nonetheless, Iron Mike has quipped a few profound thoughts (and some crazy ones). One Tyson quote I often consider refers to how plans change when presented with an obstacle. Next week I plan to help financial advisors (FAs) and other professionals by telling them what they should prioritize when working with business owners considering a sale.
I will be presenting at the 2022 Exit Planning Summit. I enjoy writing these columns because I get to share insights into how politics, the economy, and business trends affect my investment portfolios. Conferences are different because I get to advise FAs, estate planning attorneys, Certified Public Accountants (CPA), and other industry professionals.
The Exit Planning Summit is attended by those who help business owners grow the value of their company and prepare it for sale (their “exit”). I plan to present the “soft” side of the process — speaking with business owners about their personal readiness to give up their work identity. Are they prepared for their next life stage? I plan on speaking to that because I feel I’m qualified to have that conversation and that the FAs and other professionals may not have the opportunity to get that type of advice elsewhere.
That’s the plan. However, I expect to get punched in the mouth, metaphorically speaking (hopefully). When it comes to speaking with exit planning advisors, this won’t be my first rodeo. The soft side is essential, but what advisors really want to know, based on the economy, is if it’s a safe time for businesses to sell, expand, or lay off workers. I always reply that it depends on your time frame.
My job as a business consultant makes perfect sense. As an investor, I’ve spent my adult working life figuring out if a company is valuable or garbage. If it’s a good company or industry, does it have weaknesses that are a risk to my portfolios? As a business consultant, it’s my job to identify and measure the shortcomings of a business or sector. As an investor in the markets, it’s the same.
Take Out the Trash
The situation is the same for investors as it is for business owners — it depends on your time frame. If you need the cash, sell; if you own a good company, you can hold onto it; if it’s garbage, either sell it or upgrade.
The rest of 2022 is not the time to hold onto garbage stock. Higher interest rates increase the cost of growth, which is often funded through debt. With interest rates rising, investors should tilt toward companies with solid earnings and predictable growth instead of those in need of funding rounds and valuations based on price-to-whatever-craziness-that-is-in-vogue-today. While the stock market may have priced in all the future rate hikes, there could be more than many expect.
This column will be published just days before the Federal Reserve’s May 3-4 meeting to set interest rate policy. Once upon a time, not too long ago, the scary consideration was a quarter-percentage-point rate hike per Fed meeting throughout 2022. Since then, I have parsed the language of speeches and comments by some Federal Reserve members. Currently, it feels as if there may be one or two half-percentage hikes thrown in to accelerate the process. The Fed might go a half-percentage point this coming meeting and then three-quarters at the June 14-15 meeting. The Fed hasn’t done three-quarters at once since 1994. However, they also haven’t had to fight off nearly double-digit inflation since well before then.
In the long run, I wouldn’t want to bet against innovation. But if you need money soon, you could use this opportunity to reduce your tax exposure and sell off some of those stocks which have taken a hit this year. Suppose you have unrealized losses in a taxable account. In that case, you could sell the stocks of companies struggling with profitability and margin growth. Those companies may have business models that will someday replace the status quo, so you can always return to them. To avoid the wash-sale rule, wait at least 30 days before buying back.
But, if you do sell some losers, you don’t have to stay out of the market. As I explained in last week’s column, I reduced my sector-specific investments and broadened my equity allocation. While I can make a case for an economic recession in 2023 or 2024, I am not yet ready to do anything other than take small moves to protect my portfolios. I would consider “upgrading” your portfolio by replacing risky, low/no-profit stocks with quality companies a smart, but ultimately small, move.
I wouldn’t blame you if you wanted to hold onto the cash. Many other people feel the same way right now. Investors have been very bearish. However, given the contrarian nature of sentiment indicators, the broad U.S. stock market feels more like a “buy” than a “sell” at this time.
According to the American Association of Individual Investors (AAII) Sentiment Survey, the percentage of respondents reporting as optimists fell to its lowest level since 1992, to 15.8%.
The 15.8% bullish level is lower than during the bursting of the Technology Bubble, the Great Recession, and even the early days of the COVID-19 pandemic. When bullish sentiment gets so low, that’s often a signal that the market is setting up for a rally at some point. Our friends at Bespoke looked at prior periods when AAII sentiment dropped to the 15-20 range and found that returns of the S&P 500 often performed well 3, 6, and 12 months after those occurrences.
If you’re a business owner or an investor, or both, it’s an excellent time to make some upgrades. Stick to your plan but be ready to duck.
Allen Harris is the owner of Berkshire Money Management in Dalton, Massachusetts, managing investments of more than $500 million. Unless specifically identified as original research or data-gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Full disclosures. Direct inquiries: aharris@berkshiremm.com.
