Investment Lessons From The Corona Pandemic.
These past few weeks have been the biggest stock market declines I have experienced since I started investing, with there being days where I was both petrified and euphoric. In this post I want to share a few lessons I learned from these events and in doing so analyse my decision making process. As all of you know the coronavirus has caused chaos first in a province in China and more recently in many parts of the world most noticeably in Italy where the most deaths have occurred outside of China. The loss of lives have not been the only impact with billions of pounds being wiped out from the financial markets with the mass exodus of investors pulling out their capital. In my previous blog I mentioned the numerous bargains available to the long term investor and the following are some key takeaways for preparing and acting for market falls.
Get into cash and lots of it.
A few weeks before the decline, the stock markets were euphoric and making all-time highs and I should know this because one of my investments the S&P 500 index which tracks the 500 largest companies in the United States was hitting its peak valuation at £1.00. This should have been the perfect time for me to sell and cash out my profits but I continued to sit back and do nothing which has cost me dearly with it declining significantly in the process. A similar situation arose with Avast plc one of my other holdings which had risen significantly and again one I should have sold and moved into cash awaiting the fall. Having cash is like having bullets ready to fire at the prized herd of deers’ standing in close proximity and getting lots of them in the process. A lack of cash will mean losing out on many high quality companies selling at distressed prices and who have the ability to produce superior returns in the long run.
Read Read and Read !
The great Roman Philosopher Seneca once said “Luck is when preparation meets opportunity” and this particular quote is most relevant in investing. A market crash is a fortunate event for the ones who believe in the bright future that lay ahead for their countries and subsequently the companies within the nation but in order to seize the great opportunities you have to know enough about the companies on offer. The annual reports and 10K’s (if investing in the US) of almost every listed company can be found on their website and reading and understanding the business and its future prospects are mightily useful for investors. In addition reading and analysing their financial statements to assess their profitability, cash flows and balance sheet strength really encompasses the preparation process.
I would suggest from my own experience to make a short list of 10 companies you find comfortable understanding their business and are in good financial shape and devout your time and energy really studying these. From that list, pick out the top 5 and allocate capital towards them. This concept of having a concentrated portfolio stems from my belief in the opportunity cost, that you want to forgo the subpar companies and put money towards the truly brilliant ones that would give you superior returns over the long term. Just like you would go into a restaurant and not order a lot of different dishes from the menu but order your favourites.
Buy deals and not the market.
During market sell offs there is always the temptation to buy stocks in the markets which are most depressed in valuations. However it is most important that investors look for individual companies which have fallen significantly in valuations by 40, 50, and 60% but have a catalyst of change around the corner once the dust settles and the fears have been erased. It is also vital that you feel comfortable with further falls in the share price once you have bought the stock as it’s just the market pricing something based on the psychology of others. Another important thing one should do is to buy income producing assets and not panic and go into buying cryptocurrency or gold, even if you panic about the future. A good income producing asset like a stock or farmland will produce returns every year in terms of dividend and income but a non-productive asset like gold only has value as long as someone else is prepared to pay a higher price. In 10 year time a stock you buy today would have produced years’ worth of income and positive cash flow, and dividends would pile up in your account but the gold would remain the same, having not produced anything but its price and ultimately its value, dependant on if they have any demand for, at that point in time.