“Buy the Garbage” (market commentary)

hank

Barron’s sometimes publishes brief excerpts from newsletters or other market commentators. These do not necessarily reflect the opinion of the magazine. This one’s off-beat enough and short enough that I’ve quoted the entire piece as it appears in Barron’s for whatever interest it may hold.

“Buy the Garbage” - Insights from Heritage Capital Oct. 14:

“If the rally continues, we should see the most beaten-down stocks bounce the hardest for now. I literally laugh out loud when I hear pundits advise investors to buy ‘good, solid companies with strong balance sheets, cash flows, and dividends’ during bear markets. That's about the worst advice. When bears turn to bulls, the garbage and most beaten down initially rally the most. — Paul Schatz ” (From “Market Commentary” / Barron’s - October 17, 2022)

Unable to provide working links to Barron’s. But here’s a link to a commentary from Heritage Capital by Paul Schatz dated October 14. https://investfortomorrow.com/blog/bells-may-not-be-ringing-but-they-are-being-polished/

Mark

"When bears turn to bulls, the garbage and most beaten down initially rally the most. — Paul Schatz ”

I'd like to see the data and/or white paper that backs up that statement.

Old_Joe

Well, maybe the key qualifier there is "initially". How long is initially? 10 minutes? 10 days? 10 points on the S&P or Dow? 10 months?

Without a clear definition of "initially" the whole concept is simply "garbage".

hank

There’s certainly a lot of negative commentary / sentiment out there. And I’m not buying any more garbage than I already own! Yet - I think it’s worth noting that for every seller on any given day there has to also be a buyer.

Point being: Sentiment cuts both ways. Not entirely one sided.

Speaking of garbage. The antithesis of garbage would seem to be blue chip. No? So I checked TRBCX (T Rowe Price Blue Chip Stock Fund). It is down 39.5% YTD. That’s a garbage-like number. So kinda muddles the distinction ISTM. / Shakespeare - “What’s in a name?”

yogibearbull

There is some validity to what Paul Schatz said.

Stocks beaten down by market forces (not for fundamental reasons) do rebound strongly later. January-effect for small-caps and tax-loss hit stocks is based on that. As they say, grease does float to the top.

His suggestions of tax-loss harvesting (TLH), Roth Conversions, adjusting portfolios when market is down are also good.

While every share sold has a buyer, that doesn't mean that things are in equilibrium. It depends who the buyer is. An eager buyer or last-resorts dealer/market-maker who has professional obligations to buy and sell when others won't trade. So, if the buyer is dealer/market-maker, shares sold are successively marked down on small lots and price collapses.

WABAC

The beat downs will continue until morale improves.

I wonder how his thesis plays out when P/E ratios are dropping to single digits, like the last time we dealt with inflation. Get that info and we might find out what initially means.

Mark

So does this mean we should be backing up the truck in the direction of ARKK?

Old_Joe

Don't change the subject...we were talking about garbage. Oh... wait a minute...

hank

Mark said:

So does this mean we should be backing up the truck in the direction of ARKK?

Yes and No. In principle I think ARKK will rebound sharply one of these days - probably by the end of this year. Many of its holdings seem to meet Schatz’s definition of “garbage”.

In reality, I sold my small hold on ARKK Friday and moved the $$ into a low-vol stock I’d been following for a while. Rare for me to sell anything for a loss. But couldn’t cope with the volatility ARKK brings. The problem emerges when you begin rebalancing your portfolio. Do you really want to sell things that are making money and move that $$ into something like ARKK? Somebody else will have to pick up this hot potato.

d

hank

yogibearbull said:

While every share sold has a buyer, that doesn't mean that things are in equilibrium. It depends who the buyer is. An eager buyer or last-resorts dealer/market-maker who has professional obligations to buy and sell when others won't trade. So, if the buyer is dealer/market-maker, shares sold are successively marked down on small lots and price collapses.

Interesting. Thanks.

Crash

I'm d-c-a-ing in baby steps, still. Has a decision been made yet to boycott Russian aluminum? NHYDY.
https://www.reuters.com/markets/commodities/us-considering-complete-ban-russian-aluminum-bloomberg-2022-10-12/