Revolution Investing: The stock market has a ‘binary’ feel to it, so it’s time to reduce risk


The stock market has priced in a robust recovery from the COVID-19 pandemic. But the outlook for the U.S. economy is the cloudiest I have seen in 30 years.

I’m shocked at how binary the two most likely outcomes are right now, with impending doom on the one hand and impending boom on the other.

Just this week, the Centers for Disease Control released a travel advisory warning against all travel to Canada. This warning includes people who are already vaccinated because of the high risk of COVID-19 variants. Now add in the challenges of getting vaccines to people in poorer or less developed countries and you can see that we might not be in the final innings of the pandemic.

In addition to the risks presented by the pandemic, I am beginning to think that something that has been previously brushed off by the market — say, inflation fears, oversupply of new issues through SPACs or an unexpected event such as a hedge fund blowing up — could trigger a market selloff in the near future.

If you missed it, a multibillion-dollar hedge fund (a “family office,” legally) named Archegos Capital imploded two weeks ago when its levered-up portfolio faced margin calls from prime brokers. Through a series of private contracts between Archegos and banks such as Credit Suisse and Nomura, Archegos was able to synthetically hold large unreported positions in companies including ViacomCBS Inc.
Discovery Inc.
Baidu Inc.
Tencent Holdings Ltd.

and Farfetch Ltd.

with up to five-to-one leverage. When the banks began to liquidate Archegos’ positions in these companies, the stocks crashed. Viacom went from over $100 a share down to the $40s in only four days. Obviously this is not some penny stock collapsing; this is a real multibillion dollar company that got cut in half by one fund.

Early warning?

Is this an isolated event by a reckless investment fund manager or something that has become commonplace? Remember back to the housing crash that started the Great Recession. Shady mortgage derivatives were not a big deal until they became a Big Deal. Are popular stocks today being propped up by a bunch of billion-dollar hedge funds through off-balance sheet equity swap contracts? I don’t know the answer and am losing some of sleep over it. This is a good signal that it might be a good time to take risk off the table and trim some of the big winners that we have had — and maybe even sell some of the ones that are underperforming.

This is not a call to go out and sell everything. Take a look at your portfolio and evaluate how much risk you have. Have you neglected to trim some of our huge winners? Are you over-invested in the Space Revolution? Do you have a large position in a company that causes you to lose sleep? If the answer to any of the those questions is yes, then it is probably a good time to take a little off today.

With all of that said, I could be wrong. This bubble-blowing bull market might rage on for three more years without looking back. But this is where investing for the next 10,000 days requires us to take a look at the risk/reward of our current environment and make investment decisions based on that analysis. I feel the risk of 10%-20% downside is much higher than missing out on 10%-20% percent upside at this moment. And that is why I am trimming some today.

Space stocks

On a brighter note, I am still constantly researching everything that I consider Revolutionary. As you know, the Space Revolution has been one of my biggest focus areas. Some of you are down 10%-20% on some of our space holdings. We are early adopters and sometimes that is the price you pay to be early in a trend. My thesis hasn’t changed — the Space Revolution will become a trillion-dollar market in the next five to 10 years.

The space economy is going to grow five to 10 times over the next five to 10 years, and I am obsessed with trying to find the best companies for us to invest in. The problem with trying to invest in the space industry right now is that it’s still at least a year or two before it goes mainstream. A lot of the space companies that have come public in the first quarter are questionable, and space stocks have been underperforming so far this year.

I like to wait for the opportunity to load up on my favorite long-term Revolutionary stocks when the markets are ignoring them. Investing in space at this early stage — call it the top half of the first inning of the Space Revolution — is obviously riskier than shares of companies that already have long-term cash flow. But the upside potential probably more than makes up for that risk, as long as you are careful as the Space Revolution develops.

Check out this webcast that I watched this week that features a few of the CEOs of our space stocks. It is informative, although I did not like the performance of some of the CEOs on the panel.

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