August 13, 2017 North Korea

Risk/Reward Vol. 361

THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN.

There is nothing like the threat of a nuclear holocaust to test the strength and resiliency of the stock market.  And given that the rhetoric exchanged this week has not been experienced since the Cuban Missile Crisis of 1962, I would say Mr. Market came through very well.  Despite the sabre rattling, all three major indices ended the week down only 1-1.5%.  Hardly a blip for those who have done so well this year.  Why the drop?  As those who have experienced such times in the past know, whenever there is the threat of a major negative event many investors decide to take profits off the table.  A concomitant "flight to safety" ensues.  This manifests in a sell off of stock and the purchase of the safest investment known, US Government Bonds.  This played out as expected with the yield on the all important US Ten Year Bond dropping from 2.28 to 2.191% this week. (Remember a drop in yield means that the demand and price of the bond is up.)

My portfolio dropped more precipitously than the indices.  Three reasons underlie this: 1) since closed end funds (my favorites) are thinly traded, a flight to safety invariably exaggerates the decline because there are fewer buyers to stop the stampede; 2) many of the funds I own went ex-dividend on Wednesday and Friday which always results in a temporary decline ; and 3) many closed end funds were trading above net asset value which is an independent reason to sell.  Had I not experienced such a flight in the past, I may have panicked.  I did not.  Instead, I checked that the value of the bonds to which they are correlated had increased, and I checked the strength of the underlying assets each holds.  This exercise confirmed that the cause of the drop was indeed exogenous.  Friday's positive action in the sector is evidence that a buying opportunity may be afoot.  If the upward trend continues on Monday, I will be a purcaser.

I had a delightful face to face with a subscriber this week during which we exchanged observations and ideas.  I find this invigorating and was reminded that one reason I started Risk/Reward was to engender just such conversations. Sadly, with few exceptions this type of dialogue has not developed.  Sometimes I feel like WALL-E.  During this week's meeting, I listed and prioritized my daily reads.  I put the Financial Times, Seeking Alpha, Twitter and Grant's Almost Daily blog above the Wall Street Journal and IBD.  Two of my favorites are free!  I also recommended reading books by Benjamin Graham, Bill O'Neil and Jim Cramer--- in that order.