We are now in the final stages of an economic boom that began in March 2009. When it is over, and it will be eventually, stocks will fall together, but fiscally responsible companies less so than leveraged ones. For today we will use the example of William Hill, an increasingly attractive income investment benefiting greatly from the boom, but first a word on strategy in general.
All equity markets are now in parabolic mode from a decade of record-breaking money printing across the Earth. Futures in the US are up again this morning. It’s seemingly relentless. For the next 3 to 6 months, it should be easy to make money in most sectors, gaming included.
The most challenging part of 2018 will be selling when you’re euphoric about your gains and every instinct tells you to just keep holding and counting your paper profits. This is not a wonderful idea, as ideas go. My suggestion for this year, and it won’t be easy, speaking for myself mostly: Set three or four hard, realistic numbers in three to four stages for scaling out of stocks, and stick to them. After you sell, don’t look back to see how much profit you missed, because you will miss and it won’t be worth counting how much. You’ll just be tempted to go right back in as danger increases.
For example, for any particular stock you own, scale out of, say, 20% when you reach 20% profit, 30% when you reach 30% profit, and then 60% when you reach 60% profit or some such similar calculation. Pick a theoretical high for each and scale out as you get near it, basically. Committing to holding a small percentage come what may is fine. Just make sure that you’ll be emotionally OK holding whatever percentage you commit to no matter the losses. In other words, make sure you’re not risking all or even most of your gains.
Granted there are more exact mathematical approaches to scaling out of equities and if you have such an approach, do use it. All the math aside, stick to the principle. It’s time to monitor gains carefully and lock them in as you meet your predefined goals for each stock. Make sure they are staged in increments and be loyal to them. By the end of 2018, if will be those who are loyal to this principle that will beat those calculating daily capital gains, bragging, and massaging their emotions without locking them in.
Now let’s get to specifics. William Hill, a great example for this strategy because its dividend is quite generous, leverage is only 25%, and it is still significantly below all-time highs from the previous boom. For background, the firm just announced that it is likely to beat earnings estimates by a wide margin. Operating profit is forecast at 11% higher than the year before, ahead of estimates. William Hill will have a great year (at least the first half) not only because of the boom, but because of increased win margin as well. Downside is they are considering backing out of Australia due to government interference there. Australia accounts for about 7% of top line. This gives stockholders good reasons to both buy and sell. The dividend is still above 5%, a great opportunity to lock in some really nice income in the months ahead.
No surprise here considering we are in the parabolic stages of the boom phase. In order to craft a viable exit strategy though, it is essential to consider the downside as well. Don’t forget that anyone who bought William Hill at any time during 2013 is still down or even at best if you count dividends. Even if you bought the stock during the final 6 months of the previous boom for gains of 36%, you’re still only basically even now plus dividends. If you don’t have disciplined targets capital gains, you can still lose even if you catch every part of this current boom.
So how high can William Hill go and how fast? The previous William Hill bull began in November 2008 and ended July 2013 for gains of 400%. Nobody was able to bag all of those gains, so don’t even try. The good news is, we are still 30% below all-time highs, so 30% gains are a good target for the first tranche of selling. Technical traders are most likely looking for that all-time high of 488 at the very least. I would say the chances of that target being hit, given boom conditions currently, are pretty fair. But even so, the first target for WMH traders should be 420. This was the previous high before the financial meltdown of 2008. We are now at 338.6. A move to 420 would be a gain of 24%, much more than Warren Buffet’s portfolio makes in a year on average. When that number is hit, start scaling out.
The next target can be the all-time high at 488, then the psychologically important 500 level for the next two tranches of selling. The rest, 20-30%, can be kept for dividends and speculative gains, and traders can use money supply data, yield curve data, or inflation data to time the final tranche of selling for this boom. If and when the yield curve goes negative, or inflation by government indexes tops 3%, it’s time to sell equities and go long hard assets and stop speculating equity tops.
Throughout the whole scaling-out process, it is imperative not to forget the potential downside numbers, so instead of counting gains you may lose by scaling out, comfort yourself by counting losses you have potentially avoided. William Hill shares lost a spectacular 77.5% from September 2007 to November 2008. Those losses can repeat themselves in 2018 or 2019, so it’s better to lock in gains gradually and leave a small percentage for speculating the top rather than to count higher and higher paper gains without locking anything in out of fear of missing parts of the rally.