View From The Street

Short Memories

Investment management during market corrections

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to Advisor Magazine. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]

From its Feb 19, 2020 ATH (All Time High), the S & P 500 finally succumbed to COVID in a six month correction steeper than any since the Crash of ’87. On March 27th 2020, it hit a low of 2,237.40, falling nearly 40% in just 35 days. Less than five months later (August 18th), it struck a new ATH of 3,389.77, erasing the shortest “correction” in stock market history.

In those six months, the markets traveled as far as it had taken more than eighteen months to travel in each of the three major meltdowns of our lifetimes. CEFs pretty much followed the “market value” trail of other securities, while continuing to pay out more in distributions than any other investment medium. ETFs didn’t even exist for the 1987 fireworks, and Mutual Funds are not designed for income production, so neither come equipped to take advantage of corrections.

In ’87, I remember clients telling me things like: “don’t buy anything until this clears up”. In mid ’99, I remember bidding farewell to others for refusing to chase the NASDAQ dot-coms with their inflated prices and zero dividends. In 2010, I remember the smiles, as income CEFs (especially the tax free variety) led the charge to new portfolio market value highs several months before the S & P 500 did the same.

Revisiting Investment 101

The lessons learned then that relate most directly to the situation we may be moving into now, are the “Investments 101” basics that have been talked about regularly in the Face Book Closed End Fund Groups. The Wall Street media and other institutions are not designed to help individual investors manage their portfolios; chasing portfolio market value growth and preparing a portfolio to provide stable and growing retirement income are two different things.

The latter cannot be achieved without appreciating and including these portfolio management principles in your process:

  • Selection QUALITY based on a wide variety of safety, stability and performance standards.
  • Broad DIVERSIFICATION rules based on position size, sectors, global representation, etc.
  • INCOME production from every portfolio of securities at a distribution nearly double the dividend output of even the best “dividend dignitaries” worshipped by value orientated investors.
  • Disciplined, cycle sensitive, targeted PROFIT TAKING that in 2021 produced nearly twice the normal realized income (potential spending money) generated by CEF distributions alone.

Additionally, and particularly during either corrections or episodes of “irrational exuberance”, successful portfolio management requires acceptance of some blasphemous concepts about performance evaluation. A focus on portfolio “Working Capital”, and the “Base Income” that it produces at any time is a far more useful and forward looking performance measurement tool than either the market value or total return at four points in the earth’s movement around the sun.

Keeping Capital and Base Income Growing

So during “corrections”, your objective should be to keep both your working capital and your base income growing as you selectively and strategically reinvest an estimated annual cash flow of well over 8.5% (right now), mostly in monthly distributions… as you can in a portfolio of professionally managed CEF portfolios.

Yesterday, as the “correction” reached 12%, CEF content portfolios were increasing working capital and taking steps to grow 2022 base income.

In recent years, opportunities to “reduce cost basis and increase yield at the same time” at this high a level have been short lived. Don’t miss them when they are available.

So your subconscious just said “but, what if it’s different this time?”. It may be, in length, breadth, or depth, but nothing over the course of the past 50 years has given us reason to believe that there will ever be a correction/rally that will not be supplanted by the next rally/correction. And with higher quality, diversified portfolios of income producing diversified portfolios (CEFs), the longer it takes, the better.