What I’ve been doing with my own money – and what that says about markets

Dominic Frisby attempts to divine the state of the markets through his investment decisions, and concludes that there’s a bit more turmoil to get through yet.

181031-markets

Well, that man Mr Volatility has made a rather clamorous return to the markets.

Huge up-days, huge down-days they are now the norm once again.

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Today we try and make sense of what is going on by investigating my subconscious.

Often I use these columns to clarify my thinking. Sometimes I'll start off planning to make the case for one thing, but by the time I've reached the end of the article, I'll have argued myself round to the other side.

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Once I've arrived at a conclusion, I'll go and implement that investment decision if one needs to be implemented.

Here's what I've been doing with my money

The markets have been rather fast-moving recently, so today, I'm going to do this backwards. I'm going to tell you about the recent investment decisions I've made. From those decisions, we'll see if we can articulate what my subconscious investment manager is saying about the markets.

Broadly speaking, I have three portfolios.

First, there's my long-term buy-and-leave portfolio. I keep stuff that I don't have to worry about in here, and I don't trade it often. It includes things like my SIPP and my Isa (both full of sensible trusts, dividend-paying large caps that kind of thing. One reason I don't trade very often in this portfolio is the stamp duty on these). Also, there is my precious metal, and some crypto assets that I count as long-term buy-and-leave as well.

Then there's my trading portfolio. Although I have held some of the companies in this portfolio for several years, a lot are bought and sold with a shorter time-frame in mind. They tend to be small caps, more risky and volatile. Sometimes they work, sometimes they don't. The overall value of this portfolio is less than half the value of my buy-and-leave.

Finally, there's the play money. This amounts to less than 5% of the buy-and-leave fund. When I have success with this portfolio, I'll lighten up and transfer to more sensible portfolios lower down the risk ladder. There have also been occasions where I've had margin calls and had to transfer funds in.

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I'm betting on platinum, the pound, and some gold stocks

Starting with the play portfolio, I am currently long platinum, because it's too cheap and the chart looks fantastic. I am also shorting sterling against the Canadian dollar, and I am long sterling against the euro.

I am bullish about sterling from a valuation point of view. It is too cheap. I've said this many times. But much as I may want to , I can't go all in while such a botch is being made of Brexit. The fate of a currency is often determined by the strength and competence of the leadership, and while we remain as rudderless and bereft of philosophy as we currently are, sterling is going to be hamstrung.

My sterling-euro position is underwater, by the way, but I am holding on because I am confident it will come good eventually. Sterling may have problems in the short term, but, longer term, the euro's look bigger to me.

I am also short the S&P 500. I've been trading this market quite well lately, but I've been trimming my positions, as, in my head, I can't quite decide whether to go "full bear".

A bear market is long overdue, especially in the US. But I still have the nagging memory of just how strong the US stockmarkets have been. I don't want to get wiped out in all the volatility.

In my next portfolio up, the trading portfolio, I have some gold stocks, and have been cautiously buying some more. I'm conscious, however, that even though gold has been creeping up, especially since the Barrick-Randgold merger, gold stocks have decoupled from the metal.

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This was triggered by abysmal quarterly results from the once lauded mining giant, Goldcorp (NYSE: GG). Goldcorp sold off by 25% and this triggered an avalanche of selling in the gold stocks exchange-traded fund, GDX. Such is the risk of passive funds: the incompetence of one company can bring the whole sector down with it.

Goldcorp was once the largest mining company in the world. In 2011 it was a $50 stock. Under the stewardship of its current chief executive, David Garofalo, who took charge in February 2016, it has now slipped below $10 and sits at the same levels it was in 2002, when gold was trading around $300. It's breathtaking in its badness.

Some of my gold stocks are special situations. And I have some special situations in other markets as well a helium company I like (it can only go up boom, boom), for example; a blockchain tech company, a zinc company, and a few others. I'm about 20% in cash.

I am still long, but I have become a lot more cautious

Finally, to the buy-and-leave. Normally, I like to be fully invested in this portfolio, or close to. Buy-and-leave with cash in a low interest rate environment does not make a great deal of sense unless everything else is falling at a faster rate than cash is losing its value.

But even here I have over the past few weeks been lightening up on positions a little, particularly in some of my investments that are tech- or small-cap-oriented. That says I think that these things are going still lower. I'm conscious that, even though the US only recently peaked, other markets have been much weaker for longer.

One of the dangers of going to cash is knowing when to buy back in. Sometimes it is not so easy. You sell, avoid the downdraft, but then are out of the market when then rally comes. You may as well have not bothered selling.

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That said, when it comes to market timing I am generally a better buyer than I am a seller so I am reasonably confident I'll get my re-entry right. I'm not ready to do that just yet.

So there you go folks: that's my view of the markets, as told by my actual investment decisions. In short, I'm still net long, but I have substantially de-risked.

I guess that means my subconscious thinks we have a bit more turmoil to get through.

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