Look to enjoy the melt up, but be well prepared for a melt down: Investor's Advantage Corp. President

John Grace, Founder and President of Investor’s Advantage Corp., joins The Final Round to highlight what bank earnings means for investors and his outlook for the second half of 2020.

Video Transcript

SEANA SMITH: Welcome back to "The Final Round," the Dow closing higher for the fourth day in a row, jumping more than 200 points. Investor sentiment, of course, getting boosted by encouraging news on the vaccine front-- that's what we've been talking about so far in the show-- then also on the strong earnings results, especially what we got out of Goldman Sachs. For more on this, I want to bring in John Grace.

He's the founder and president of Investors Advantage Corp. And John, earnings season underway, we ran some of the results better than expected from some of the banks, I should say. But it's still tough to figure out where to put money toward, tough to figure out a playbook at this point. So how do you think investors should and can best manage the uncertainty that we're seeing this environment?

JOHN GRACE: Well, Seana, it's a great question, and we just have to be as agile as palm trees in Hawaii because we have no idea which way the winds are blowing, which-- how bad it's going to get. Are they going to be hot winds or cold winds? There's just a lot of uncertainty going on. So there-- I would not say that there-- that anything is at all certain at this point. So as I say, you have to be agile and look to enjoy the melt up, but be well prepared for a meltdown.

SEANA SMITH: So you have to be agile. You have to be well prepared for a meltdown. So what are you telling your clients? When your clients come to you, they're trying to figure out what stocks to favor, what sectors to favor. What stands out to you?

JOHN GRACE: Well, the first thing we want to do, Seana, is to help them answer that question, which is how much loss can you accept. Because see, if it-- whatever that number is, if the portfolio performs within your specific parameters, who cares what the market does? Who cares what the virus does to the market? Because you're still in the game, as opposed to trying to go for a Hail Mary pass just to get back in the game.

So it's all about limiting the losses. And for example, we saw, what, from February 19 through March 23, Microsoft 30% from that peak to trough? You need, what, a 50% gain? We've had a great return so far, but the Dow and the S&P are still in negative territory. Only NASDAQ is in positive territory.

So yeah, let's see how bad it could get. And if you can live within that ratio, if you will, then you don't have to worry about what the market does. And I think that's where the-- where it's really important for investors to focus.

RICK NEWMAN: Hey John, Rick Newman here. That meltdown you just referred to, what might that be, just an overall decline in the broad market, or are you looking at certain sectors who might get hit more than others?

JOHN GRACE: Well, I think it's going to be an overall decline in the broad market. I am saying do not be surprised to see from here a loss of 40%. And the math, in that case, I think you'd need about 66.5% just to fully recover. So nobody can see the future. I can't either. But you know, when we see everything seemingly going to the moon-- and a lot of it is based on optimism, nothing fundamentally set in the foundation at all-- we're not prepared for earnings. I don't think the market is. We're not prepared for the trade war that is re-- coming up again like it did fourth quarter 2018 when the market was off 20%, as we all recall. And we're not prepared for this massive wave of bankruptcies that we're not going to miss.

RICK NEWMAN: But John, doesn't the Federal Reserve patch everything up these days? I mean--

JOHN GRACE: Well, that's what--

RICK NEWMAN: I'm being facetious, but we-- I mean, you know, investor-- the investor belief at this point is just that no matter what goes wrong, the Fed has got their back.

JOHN GRACE: We'll see how long and how well that plays. At the end of the game, you run out of tools. And it may be much like getting to your backyard pool with-- you could get to your backyard pool with people in it. And you're coming up with a water gun, and I've got a water bazooka to take you down with, OK? So at some point, we literally run out of water or run out of bullets. And yes, the Fed has done everything it can and everything it was willing to do, more than anybody suspected, and I think that's what has contributed to the markets being at these levels. But that doesn't mean we're not in a bubble. And we all know, even at the age of seven, that all bubbles burst 100% of the time.

ANDY SERWER: Hey John, you kind of have an unusual position in that you understand the media and investing, right? You kind of have a foot in both camps. And I'm wondering what you think about how the media has been covering the financial markets this year and the messages that have gone out. And do you think they've got it right, or do you think there have been fear mongering or maybe inflating bubbles? Or what's your take on things?

JOHN GRACE: Well, it's a good question, Andy. You know, when we only look at what the Dow or the S&P or the NASDAQ did in a given day, that's interesting, but it doesn't help us see perspective. When we primarily listen to smart individuals, great college educations, but let's understand we're either representing the government, which means, of course, you want to put your man back in office, or we're representing a company that manufactures mutual funds or exchange-traded funds. I mean, when is it not a good time to buy a stock, if I manufacture stocks?

So what I'm saying is I think we have to be very interested in what might the motivation be behind the person giving the advice. Because, of course, if I manufacture stocks, I want you to put all your money in stocks-- nothing else, frankly-- and then I just tell you to sit and take it as though there's nothing else you could possibly do. The truth is there are new techniques-- I mean, new in the last 20, 25 years-- that are in deployment that most investors aren't aware of, primarily because, frankly, the securities industry-- and I've only been in it since 1979-- we're quite lazy. And we would just accept receiving all the money and enjoying all of the feats.

SEANA SMITH: John, I just want to get your quick thoughts on earnings so far because we've heard from a couple of companies, and it's obvious that we don't have-- not as many companies have issued guidance. So analysts are a little bit kind of shooting in the dark when they're coming out with their expectations. But from what we've seen so far, especially from what we saw from Goldman this morning. Do you think analysts are too pessimistic about this quarter?

JOHN GRACE: I do not. I do not. I-- as I say, it can get fast and loose so very quickly. And savvy investors recognize, they hate losses more than they love gains. So when you see the big banks, I think, you know, Goldman set aside-- what was it? About $713 million.

But let's understand, they're not as consumer focused as their peers. The other-- the Wall Street largest banks collectively, if I'm not mistaken, set aside, like, $19 billion to their loan-loss reserves over the first quarter. That should give you a sense that they see some bad news coming across the horizon. These are clouds, OK?

We'll see how it plays out. But no, I do not think people-- I do not think this is the time-- we all want to be optimistic. But at some point, you need to be realistic. And who cares whether or not you're pessimistic. It doesn't mean you're-- you've got to be prepared for the worst, and we don't know what that looks like until that bus hits you upside your head.

SEANA SMITH: All right, well, John Grace, we're going to leave it there, founder and president and Investors Advantage Corp. But thanks so much for joining us today.

JOHN GRACE: My pleasure.