Sometimes, you never see risk coming.
Think back to last year. None of us were ready for the coronavirus pandemic. It came out of nowhere, and it took a lot of investors and their portfolios by surprise.
It also happened in 2008. Maybe you thought: “Yeah, this housing bubble is probably going to end badly. I could see this leading to a recession; I could see some banks getting into trouble, and some builders, too.”
But then what happened? Lehman Brothers failed, and then the banks fell like dominoes. The entire financial system had to be propped up by the Federal Reserve and the Treasury.
And now we have the Evergrande situation in China.
In today’s Investing With Charles, research analyst Matt Clark and I discuss Evergrande, how global events impact U.S. markets and how you can protect your investments from total collapse.
Here are some highlights from our discussion:
Why the Evergrande Situation Matters
Charles: People saw Evergrande, this big construction company based in China, missing interest payments and looking like it was going to fail.
So, why did that cause ripple effects throughout the market?
Well, it’s not just because of Evergrande. One construction company fails. Who cares? Life goes on.
But this construction company has deals with tons of banks around the world. There’s a fear that if this company defaults, who’s next? Other companies may default as well, and that could take down the Chinese banking system, which could, in turn, take down the global banking system.
Remember, Europe got hit worse than the U.S. did in 2008 and beyond, even though the crisis centered in the U.S. It was our housing market that was inflated. It was our housing market that blew up. But that took down the banking system in Spain, of all countries.
So that’s how it goes. Money flows and sloshes across borders. The market blew up last week because there was this fear that Evergrande’s collapse is the next Lehman brothers moment that will take the whole system down.
Protect Your Investments From the Unknown
Matt: How can we better protect our portfolio when issues like this happen?
Charles: Trying to figure out what the next risk will be is almost impossible. Nobody’s that smart. The long-term capital management guys, the all-star team of finance geeks that run the most prestigious finance departments of the best universities in America … they didn’t see these risks coming.
So, it’s about protecting yourself from the unknown. It’s about having insurance. It’s about having, more than anything, a plan.
When you invest, you have assumptions. You buy a stock, and you expect to sell it at this higher price because you expect their earnings to come in as X, Y and Z. You have this investing thesis.
Well, you need to always have the exit strategy in case your thesis falls apart for reasons that you could have never imagined. There are a few ways to go about this:
- Use stop losses.
- Keep your position sizes small and manageable from the start.
- Have some tail risk in place in the form of options or something that protects you.
You need to have a plan, and you need to have insurance of sorts. You don’t go into anything fully exposed.
Matt: Yeah. Because the last thing you want to do is jump into the market excited about the longest bull run in history, and then something like last Monday or last week happens. And you have no idea what your next move is.
Is Evergrande Another Lehman Brothers Situation?
Charles: I don’t think there’s a risk of another Lehman Brothers moment. I don’t think we’re going to have a repeat of 2008 where the system crashes.
China has a sort of top-down controlled system. They can stop their banks from failing, but they can’t necessarily keep growth going at present rates forever.
And you may ask: “Why is China’s property market overbuilt and inflated right now?”
Because 10 years ago, they started to see their export-driven model as being at risk and they said: “Look, we don’t want to be at the mercies of the Western economies. If they go into recession, we don’t want them dragging us with them.”
So China focused on internal development, which led to this property boom. And now they’re taking some of the bubble out of that. They’re trying to deleverage that.
There’s a good chance China’s growth slows from here. And that’s a big deal. If you’re Nike, it means you’re selling fewer shoes to China. If you’re Starbucks, it means you might be selling fewer coffees to China. Apple, fewer iPhones, whatever. Just fill in the blank.
If you’re Brazil, you’re probably selling fewer commodities to China. If you’re Chile, you’re selling less copper. So we’re going to feel the effects in the years ahead. That’s why the recent sell-off was not irrational. You just have to know what to do with it.
Matt: And that’s exactly what we do in Adam O’Dell’s Green Zone Fortunes. Adam, Charles and myself help you mitigate that risk.
Charles: We don’t add a stock to the model portfolio unless we know how we’re getting out, both on the upside and on the downside.
Matt: Exactly. There is an exit strategy looking either way.
If you’d like to learn more about Green Zone Fortunes, including Adam’s bullish approach to biotech, I urge you to check out his “Imperium” presentation. He’s confident this DNA technology has the potential to be bigger than internet stocks in the ’90s. Click here to find out more, including the details on how to access Adam’s top four DNA stocks to buy today.
Where to Find Us
Coming up this week, Matt will have more on The Bull & The Bear podcast, so stay tuned.
Don’t forget to check out our Ask Adam Anything video series, where chief investment strategist Adam O’Dell answers your questions.
You can also catch Matt every week on his Marijuana Market Update. If you are into cannabis investing, you don’t want to miss Matt’s weekly insights.
Remember, you can email my team and me at feedback@moneyandmarkets.com — or leave a comment on YouTube. We love to hear from you! We may even feature your question or comment in a future edition of Investing With Charles.
To safe profits,
Charles Sizemore
Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
