Update on My Investment Portfolio:

Why I’ve Just Sold Most of My Stocks 

“Be fearful when others are greedy, and be greedy when others are fearful.” – Warren Buffett

I’ve just sold about 75% of my stock portfolio. I’ll tell you why…

The Economic Outlook Is Scary

At a macro level, our economy is fragile. For one thing, the US has never been in so much debt. The national debt has been growing pretty much non-stop for 20 years, but it accelerated significantly under Obama and Trump. It is currently $26 trillion. That is 107% of our GDP. The last time the debt-to-GDP ratio was that high was in 1948, at the end of WWII.

And then there is our consumer debt: the debt private citizens carry on mortgages, loans, and credit cards. That hit $14 trillion in March, a record high, surpassing by almost $1 trillion the record set at the height of the 2008 financial crisis.

This level of debt is scary. But what’s scarier is that there are only two or three elected officials left that believe in balanced books and sound money.

The business outlook is bleak. Since January, US GDP has dropped nearly $3 trillion, from $21.8 trillion to $19.2 trillion. Thousands of small and medium businesses, employing millions of medium- and low-skill workers, have been shut down. The economists I trust are prognosticating that as many as half of them are closed for good.

By these and many other metrics, the US economy today resembles that of the economy after the real estate bubble collapsed in 2008, except for debt, which is worse. Given that, it seems reasonable to believe that we are looking at an attenuated recession and a feeble recovery.

Longtime readers know that I don’t buy or sell stocks based on macro analysis. But I don’t ignore it either.

The Upcoming Election

This is the main reason I converted 75% of my stock portfolio to cash.

The pollsters and their pundits are predicting that Trump will be ousted in November and the Democrats will sweep the House and perhaps even the Senate. The Democratic agenda is for higher social spending, $500+ billion on infrastructure, and higher taxes for businesses and high-income earners. But I’m even more concerned with the talk about eliminating the cap on the Social Security tax.

Wall Street doesn’t respond well to the threat of higher taxes. So as we approach the November elections, if it looks like Biden will be elected and the Democrats will win both houses of Congress, it’s very likely that we’ll see a big drop in stock prices. A 30% to 50% drop wouldn’t surprise me.

So those are the three reasons I decided to sell most of my stock portfolio: I have a continuing concern about US debt, a suspicion that we have entered into another extended recession, and a strong hunch that if it becomes apparent that the Blues will dominate the November elections, the stock market will take a dive.

Longtime readers will rightly be surprised to know that I’ve sold off 75% of my stock holdings. They will remind me that my investment philosophy has always been to buy world-dominating companies and hold them long-term. They will further remind me that as recently as April 6, I repeated that viewpoint in explaining why I did not sell any of my stocks as the markets were tumbling from the Corona Crisis.

Yes, I’m violating that rule now. Let me take you through my thinking process…

I “lost” millions in March and April. The loss was just on paper, but it still didn’t feel good. Because I didn’t panic and didn’t sell then, I was able to see the market climb back up this “wall of worry.” And now I’ve regained (again, on paper) all that I had lost.

The balance of my stock portfolio is at an all-time high. But there is a fair chance that the market will take a dive sometime between now and November. And if it does, it could be, as I said, a steep dive – 30% to 50%.

So I did what I sometimes do when I’m in a confusing situation like this. I interviewed the three parts of my brain.

First, I asked my limbic brain, the part that’s in charge of my emotions: “How would you feel if that happened?”

And Limbic Brain answered: “Like horse shit. Like a fool. But I would blame-hate you for keeping our money in the market.”

Then I asked my reptilian brain, the part that’s in charge of my instincts: “What would you do if Limbic Brain felt like that?”

And Reptilian Brain answered: “I would definitely panic. I would be afraid the market would drop even further. I would take flight. I would tell Limbic Brain to sell everything – all of our stocks – immediately and eat the loss.”

And finally I asked my rational brain: “What do you think of all this?”

And Rational Brain said: “Normally, I’d tell you to ignore Limbic Brain. I’d say that Reptilian Brain is bluffing. But in this case, why take the chance?”

“What do you mean?” I asked.

Turning to Limbic Brain and Reptilian Brain, Rational Brain said: You have told us how badly you would react if our portfolio dropped again by 30% to 50%. How good would you feel if we held on to our stocks till November and they went up in value?”

“Like by how much?” they asked.

“Say, 10% to 15%,” Rational Brain said. “Which, I might remind you, would be an unprecedented three-month climb, considering where they are now.”

Limbic Brain and Reptilian Brain went into the corner, as they always do when confronted by Rational Brain, and conferred. After a few minutes, they emerged.

“So how would you feel about our making another 10% to 15% on top of our current gains?” Rational Brain asked.

Limbic Brain shrugged. Reptilian Brain, lacking shoulders, said, “Meh.”

Rational Brain turned back to me. “As you can see,” he said, “my less intelligent but immensely muscle-bound siblings don’t really care if our stock portfolio goes up. But they really, really are going to go nuts if it goes down again.”

“Yes, I can see that,” I said.

Rational Brain leaned forward and stared into my eyes. “You know what you should do,” he intoned. “Sell all or most of your stocks right now and wait until November. You will be giving up the unlikely possibility of getting modestly richer over the next three months. But you will be safe from the more likely possibility of becoming considerably poorer.”

“That makes sense,” I said to Rational Brain.

He winked. “That’s what I’m here for.”

And that’s why I sold 75% of my stock holdings. If you are having some of the same concerns regarding your investments, conduct an interview. Your brain parts are yours, formed by your own knowledge and experience. See what they have to say. And then do what your Rational Brain advises.

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