We’re now many weeks into a lockdown and it’s been over two months since the peak of the S&P 500 on February 19th. It seems that things won’t return to normal until we have a vaccine, and until then, we’re going to be in a state of heightened awareness.
What I find most interesting is that people understand and accept the fact that our society is in a precarious position for the near term, understand that many businesses will be shut down with severely impacted revenues, and yet, despite the fact that we’re in a recession, the markets are rising once again.
I’m trying to reconcile the disconnect between the current stock market numbers and the upcoming likely dismal earnings reports that will be forthcoming in the next few weeks. At the time of writing this article, the S&P is trading at 2844, which is the same level that it was trading at on August 23rd, 2019.
If I could rationalize the market and economic disconnect, I would be able to better understand how to trade the market, but therein lies the problem.
I can’t read the market. I can’t predict where the market is going to go, so I have to remind myself of the expression, “It’s not timing the market, but time in the market.”
As we headed into mid-March I had this nauseating feeling of dread. My natural instinct was to panic sell some of my equities. Fortunately, I didn’t.
I put together an asset-allocation strategy well in advance that I knew would help me weather an economic storm. My strategy and nerves were suddenly being tested.
The good news at the time, if there was any, was that my portfolio was down by 4.75% from its peak to trough, which is as much as I expected it to be down with a market drop of 35%. I had prepared myself in advance. Unfortunately, some of my stocks didn’t hold up very well (Brookfield, TD Bank are examples), and surprisingly, others help up extremely well, and in fact, advanced (Amazon, Netflix, Shopify are examples).
My game plan included buying equities when the market tanked. My plan included freeing up cash by selling some of my bond funds and then moving some of that cash into equities.
Starting on March 18th and continuing into March 24th, I sold, in small percentages, allocations from some select short-term bond funds that had held up relatively well, and moved these positions into cash. In the meantime, I had put together my stock wishlist, and was getting ready to place some buy orders.
By March 25th, I was ready to start buying some of the equities on my wish list.
My intention was to start buying, but the market climbed that day and has continued to climb and climb and climb ever since. So now I’m sitting on cash, waiting for the equity markets to fall, and other than a couple of buys, the market advance was so fast that I missed my opportunity.
I asked myself the same questions that many of you are asking yourselves:
- Will the equity market fall further?
- Is now the time to buy stocks?
- Should I buy equities or hold cash for other and better opportunities that will likely present themselves in the coming months?
What Is Going on With the Economy and the Stock Market?
There’s a belief that the stock market is a leading indicator. And for the most part, it is. The challenge with the current environment is that no one knows what’s to come and there are still too many uncertainties. What we’re dealing with is unprecedented with the global economic shutdown. We’re in a recession, the question now is, will the recession outlast the pandemic itself?
The Wall Street Journal interviewed Charlie Munger, (possible paywall) Warren Buffet’s partner and right-hand man, and published an article on April 17th, 2020.
In the article, Munger said: “One of the keys to great investing results is sitting on your ass. That means doing nothing the vast majority of the time, but buying with “aggression” when bargains abound.”
He then said: “We’re not playing, ‘Oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves [into buying businesses].’”
Munger and Buffet, despite overseeing a cash war-chest that has over $120 billion, is basically sitting on the sidelines waiting to see where things go.
Munger then said: “I don’t have the faintest idea whether the stock market is going to go lower than the old lows or whether it’s not.” The coronavirus shutdown is “something we have to live through,” letting the chips fall where they may, he said. “What else can you do?”
If Charlie Munger and Warren Buffett, otherwise known as the “Oracle of Omaha”, don’t know where the markets are headed, then what’s the average investor to do?
What we’re going through is not a typical economic slowdown. Although the market is rebounding, it still seems early. Worldwide economies are still more or less shut down.
As an investor, you can’t wait until there’s an absolute certainty. You can watch the economic indicators, and I do. I keep an eye on the global manufacturing PMI, the VIX, and the Baltic Exchange Dry Index.
What I am trying to establish is where opportunities might present themselves, and gain some perspective on the economic trends.
If you’re a small business owner, you probably shouldn’t be in the stock market at all anyway. That comment shouldn’t come as a surprise to those who read my book (free download from this link) and understand my asset-allocation strategy. But, many readers of this blog aren’t small business owners, and they’re wondering, much like I am, how and where to invest.
If you’re a business owner, preserve your cash and wait for opportunities. These will come by way of acquiring struggling competitors or real estate opportunities. That’s where you will make the greatest returns.
As I mentioned in a few of the articles I’ve written lately, like this one on real estate, or this one on industries that will thrive, I believe that multi-unit-residential will hold up fairly well, and is a good hedge against inflation. So are some stocks/companies that are in the right industries, like healthcare (biotech and pharma), essential goods (food supplies), and technology (cloud, video technology, and streaming, semiconductors, robotics), especially those with a solid balance sheet.
These companies will not only survive but also thrive in the next few years. I also believe that gold will hold its value well against inflation and most fiat currencies. Short term corporate bonds, utilities, and Canadian banks with their 6% dividend yield are all solid bets. In the meantime, I am still very defensively positioned, and I have been adding to my gold allocation.
At the end of the day, there are still too many uncertainties to know where things are headed and how to invest, as so much is dependent on the policy responses that are yet to happen.
For those who are currently invested, your best is to buy some balanced ETF index funds, continue to invest in them consistently, and over time, the world will heal, as will your stocks.
If you’re wanting to take a more proactive approach to investing and wealth creation, opportunities will present themselves, but, you need to be out there speaking with people in different sectors to find them. They don’t just fall on your lap. You should attend seminars in different sectors including commodities, real estate, small business … and study those industries.
And keep in mind, the greatest wealth isn’t going to be created in the stock markets, but, by taking outsized, calculated, and risk mitigated risks by investing in your own business. Here’s what I wrote in my last blog post: “We are sitting at the precipice of what will likely be one of the best times to start a new business in the last 80 years. Maybe even longer.”
Research as much as you possibly can. Study the industries, and become an expert in that field. When you’re ready to place your bet, the plan is that you’re so knowledgable in that field that your knowledge is how you mitigate your risk and maximize your return. And then, maximizing your business’s profits is another exercise that eludes many business owners who build an awesome business, but, struggle to find profitability.
*** With regards to Brookfield, I believe in their long-term business model, have written about them in the past, and continue to remain quite bullish. You can read Brookfield’s CEO, Bruce Flatt’s comments here.