Is the party over? 

After a piping hot 2021 market that skeptics have been calling a ‘bubble’ for some time now, investors have been given a reality check in the form of a cold bucket of water to the face.

The color red dominates most watchlists, as the market has been going through a considerable pullback to kick off 2022. Investors are understandably getting nervous with many pandemic-thriving favorites selling off substantially from their all-time highs.

In March of 2020, we launched our ‘Pandemic Portfolio’ that subsequently rallied over 100% as the COVID bull market collected steam. Companies like Zoom (ZM) capitalized on the work from home lifestyle, Clorox (CLX) was sanitizing the world, and the Very Good Food Company (VGFC) was selling their plant-based food boxes at a blistering pace to consumers frightened to visit the grocery store.

For the first time in 22-months, the S&P 500 Index (SPX) dipped into “correction” territory, with some underlying stocks faring far worse than a typical correction.

• Over the past two months, AMC (AMC) and GameStop (GME) have tumbled more than 50%. 

• As of last week, a basket of 37 meme stocks tracked by Bloomberg have gone on a seven-day slide that has wiped out 15% of its value.

• A measure of companies that went public via SPACs has crashed 65% from a February high.

• Robinhood’s (HOOD) shares are roughly 85% below the all-time high’s seen in August.

But what about our supposed savior…CRYPTO!?

Digital token connoisseurs have consistently recited to us that cryptocurrencies are a logical hedge against inflation and market uncertainty. Though I’m an advocate for owning digital currencies, this never really made much sense to me…

With Bitcoin (BTC), the world’s biggest digital currency by market cap, now ~50% lower than its November record high (and other coins faring worse), this truly doesn’t appear to be the case.

In this newsletter I’d like to provide a few reasons the overall market pullback is happening, provide some context from a long-term perspective and share a few of my personal thoughts on how I’ll be navigating the market during this precarious time.

I’m not just here to make you depressed, in fact, I’m incredibly excited for 2022!

Please read on…

1. Let’s start with the FED

TLDR: When interest rates are low, money is ‘cheap’ for everyone. People take out loans, they spend more on goods and services, home purchases increase, and companies even buy back stock. A lot of these dollars sloshing around the economy wind up in the stock market, pushing prices higher.

With more money chasing the same amount of goods, the cost of many things rises (hello inflation my old friend).

With the economy overheating, speculation running rampant and inflation moving higher above trend, interest rates will inevitably rise to tighten the money supply and force the economy to settle down. In doing so, borrowing costs increase throughout the economy and this affects savings, mortgages, car payments, credit-card debt and other aspects of people’s finances.

Dating back to 1970, the Federal Reserve (aka FED) have hiked rates around 100 times, often leading to increased stock market volatility. If we break all these rate hikes over time into 8 longer-term cycles, stocks have held up relatively well, although it is important to note that outcomes in and around those rate hike periods haven’t been all that great (4 recessions).

Regardless, the average total return in these periods was 23%: 

Investors don’t like interest rate uncertainty… 

In addition to worries about rising interest rates, stocks are pulling back due to mixed company earnings that aren’t as strong as expected.

Investors don’t like that either… 

But it’s not all bad!

Both Apple (AAPL) and Alphabet (GOOG) just reported substantial earnings that beat expectations, giving a much needed breath of relief to investors including myself (proud shareholder of both).

2. Putting things into context

Short term volatility has a great way of distracting investors from the bigger picture, and sometimes all you need to do is zoom out…

Since 1945, investors have taken four months, on average, to recover from a pullback of 10% to 20% in the S&P 500.

Recovery from a plunge of 20% to 40%, a much rarer occurrence, took 14 months.  

Drops of 40% or more, which have happened just three times, have taken 58 months, according to Guggenheim Investments.

You just can’t time the market, so it’s really not worth trying too hard.

Although it’s impossible to predict what stocks will do next, research shows that missing out on the best-performing days of the market — regardless of when the bad days are — can wreak havoc on your long-term returns.  

For example, in a 20-year period from 1999 to 2018, if one stayed fully invested in the S&P 500, your annual return would’ve been 5.6%. If you missed the best 60 days over those 20 years, your annual return would’ve been -7.4%.

60 days in 20 years! Let that sink in…

3. Let’s chat about my portfolio

After unbelievable gains in 2020 and most of 2021, I’m seeing some portfolio weakness like the rest of you…

My big tech names have pulled back (looking at you Shopify), and many of my micro caps have been beaten down.

I’ve been slowly de-risking parts of my portfolio, which all started by trimming some of my most speculative holdings last spring/summer.

Using my cash holdings, I have been adding to my long-term mega cap portfolio that consists of 24 holdings. These include:

• Big tech giants like Shopify (SHOP), Apple (AAPL) & Microsoft (MSFT), of which the latter two have been (and will continue to be) incredibly good at separating me from my money in an endless tech upgrade cycle.

• Brookfield Infrastructure Partners (BIP) & Canadian National Railway Co. (CNI) that provide critical services regardless of what the market does.

• Abbvie Inc. (ABBV) who sells the biggest drug in the world, Humira.

• Lots of other steady, boring stocks like Bank of Montreal (BMO), Telus (TU) & WalMart (WMT) (who is entering the Metaverse?! – but we’ll save that for another newsletter).

Stability is nice, and boring stocks will always be a substantial part of my portfolio…but I didn’t get the nickname Small Cap Kev by telling you I own WalMart. 

I am always laser focused on tiny growth stocks, even when the market for them looks weak. In fact, I am MOST active when penny stock markets are weak.

I am constantly searching for penny stock diamonds in the rough, and when there is blood in the streets, I feel like I am at my prime.

There are deals to be had as a result of: 

• Recent IPO’s that have been cut in half after listing.

• Solid revenue generators trading near seed financing prices.

• Stocks trading at their net asset values!

However, I am being very selective, and I have my seatbelt on because it’s likely going to be a very bumpy ride in the short term.

4. What do I look for?

It will vary by industry, but some of the boxes I look to check are as follows:

• Growing revenue in businesses that aren’t overly cyclical

• A reasonable P/S (price to sales ratio)

• Minimal, or no debt

• Cash on balance sheets to survive without a near term financing

• Strong intellectual property and tangible assets

• Competent management team with extensive industry experience

Since I wrote my book on cryptocurrency a few years ago, my thoughts and feelings on the subject have changed quite a bit.

To be frank – 90% of crypto (and NFT) investors piss me off. YOLO trades on high spec assets “just cuz” doesn’t do it for me.

I won’t touch 99.9% of NFT’s or coins because I genuinely think most of them are going to $0. Personally, I feel that over 17,275 cryptos in existence may be too many…

However, I AM a huge believer in Blockchain, the Metaverse and yes…NFT’s. With such a massive societal and business impact, you’d be out of your mind to ignore investing in the space, you just need to filter through the bullshit.  

I intend to write a longer form article in a future newsletter as I continue my research, but for the time being the low hanging fruit really is Bitcoin (BTC) and Ethereum (ETH). These coins in many ways are too big to fail and the magnitude of the mass user adoption has created network web effects; making these coins legitimately useful (for certain transactions).

I will most likely buy both, with a diversification target of roughly 5% of my portfolio (in total).