As always, this is not advice or solicitation in any way, but rather just one persons opinion.
Ok, wow, what a difference a week makes. Here’s a quick recap from last weeks’ thoughts,
“.......If you are going to invest in individual equities instead of index funds, invest with your emotional capacity for risk in mind.
Ok, this one is a little more complicated. Over the last five years, Apple and Hope Depot have returned 147% and 114%, respectively. They have all also lost at least 30% of their value during that period at least once, over a very short period of time. They have also both had periods where they gained over 40% to 60% in a very short period of time. Can you watch your investment fall 30% without undue stress, and resist selling? Can you watch your investment increase 30% without too much exuberance, and resist selling?
We all know “buy low, sell high”. Emotionally, we don’t work that way. We want to jump in when a stock is skyrocketing, and bail out when it is plummeting. This is the tiny lizard-brain stuff in the back of our brains that insures our survival but also craves what others have. So, what is your personal capacity to absorb these major movements up and down?”......
Ok, since that writing, we are down nearly 20% on the S&P from our all-time highs less than two weeks ago. I’ve been getting quite a few emails asking where the bottom is, if we’re going into recession, is this partly a “Bernie scare”, etc. I’m sure many of us have had our resilience tested. Here are some thoughts.
This is a public health crisis, not a financial crisis. Unemployment is very low. Interest rates are very low. Wages are rising. There isn’t a credit crisis like in 2008/9 when we saw Fannie and Freddie going under. Banks aren’t going under like Lehman Brothers. The treasury department isn’t injecting $412B into troubled banks. Structurally, our economy is in great shape, the banks are stress-tested, we are not in a credit crisis.
Where is the bottom? The short answer is, no one knows. The better answer is, unless you believe this will be a global pandemic that lasts through the summer, or you are living on retirement withdrawals, it shouldn’t matter to you. Corrections and panics are very well managed in the markets historically. In fact, the S&P has lost 10% or more 53 times in the course of 5 trading days. The average return over the next year following those corrections is 16%.
If you are asking from the perspective of wanting to “get in on the bottom”, then my thought is heads you win, tails you win slightly less. Trying to time it exactly is like closing your eyes when Randy Johnson starts his wind-up and swinging wildly. Frankly, your odds are probably no better or worse than if you were completely focused on trying to hit the ball. If there are stocks you liked two weeks ago because the fundamentals were good, you liked the business, and the price was fair, then you should like them even more now.
Should you go “all-in” now? Absolutely not, but I have some rules of thumb you can think about.
1) If you are 10 or more years from retirement, max out your 401k now, even if you back off a bit later to build up retirement savings outside of the 401k/IRA. Depending upon your tax bracket, the 401k is a 15%-36% immediate return because of the pre-tax nature of the account. You’ll never miss the cash, and you’ll be glad you did it.
2). Unless you have an immediate life need that requires it, don’t be a seller now. Be patient. This too shall pass.
3). If you have available cash to invest, start dipping your toes in the water slowly and consistently. It might go down another 6-8%, or it might start turning around right away and start moving up. Don’t try to be perfect. You are just as likely to miss by waiting as you are by being early. Slow and steady.
4) there’s never a good time to buy a bad business. Don’t get sucked into buying something on a tip because it is “40% off it’s’ high” or some other random measure that has nothing to do with the fundamentals of the business. If you are going to buy, buy great businesses on sale.
Ok, a couple of companies I like a lot right now. American Express is trading at a 20% discount to forward earnings. They are very well run, have a solid balance sheet, and are reinvesting capital in next generation payment processing. Apple and Google are both trading at significant discounts to expected future earnings. Apple has supply chain exposure, for sure, but this outbreak hasn’t happened in a product launch cycle, so the effect is no where near as drastic as one might suspect. Google derives nearly all of its revenue from search, ads, and web services. Can anyone think of any reason at all why their business should be hurt right now? Are your searches up or down? Are companies adding or subtracting web capacity? In an election year, do paid ads go up or down? Google is my personal favorite right now.
Try not to stress too much. Go Cocks, beat Clemson!
Ok, wow, what a difference a week makes. Here’s a quick recap from last weeks’ thoughts,
“.......If you are going to invest in individual equities instead of index funds, invest with your emotional capacity for risk in mind.
Ok, this one is a little more complicated. Over the last five years, Apple and Hope Depot have returned 147% and 114%, respectively. They have all also lost at least 30% of their value during that period at least once, over a very short period of time. They have also both had periods where they gained over 40% to 60% in a very short period of time. Can you watch your investment fall 30% without undue stress, and resist selling? Can you watch your investment increase 30% without too much exuberance, and resist selling?
We all know “buy low, sell high”. Emotionally, we don’t work that way. We want to jump in when a stock is skyrocketing, and bail out when it is plummeting. This is the tiny lizard-brain stuff in the back of our brains that insures our survival but also craves what others have. So, what is your personal capacity to absorb these major movements up and down?”......
Ok, since that writing, we are down nearly 20% on the S&P from our all-time highs less than two weeks ago. I’ve been getting quite a few emails asking where the bottom is, if we’re going into recession, is this partly a “Bernie scare”, etc. I’m sure many of us have had our resilience tested. Here are some thoughts.
This is a public health crisis, not a financial crisis. Unemployment is very low. Interest rates are very low. Wages are rising. There isn’t a credit crisis like in 2008/9 when we saw Fannie and Freddie going under. Banks aren’t going under like Lehman Brothers. The treasury department isn’t injecting $412B into troubled banks. Structurally, our economy is in great shape, the banks are stress-tested, we are not in a credit crisis.
Where is the bottom? The short answer is, no one knows. The better answer is, unless you believe this will be a global pandemic that lasts through the summer, or you are living on retirement withdrawals, it shouldn’t matter to you. Corrections and panics are very well managed in the markets historically. In fact, the S&P has lost 10% or more 53 times in the course of 5 trading days. The average return over the next year following those corrections is 16%.
If you are asking from the perspective of wanting to “get in on the bottom”, then my thought is heads you win, tails you win slightly less. Trying to time it exactly is like closing your eyes when Randy Johnson starts his wind-up and swinging wildly. Frankly, your odds are probably no better or worse than if you were completely focused on trying to hit the ball. If there are stocks you liked two weeks ago because the fundamentals were good, you liked the business, and the price was fair, then you should like them even more now.
Should you go “all-in” now? Absolutely not, but I have some rules of thumb you can think about.
1) If you are 10 or more years from retirement, max out your 401k now, even if you back off a bit later to build up retirement savings outside of the 401k/IRA. Depending upon your tax bracket, the 401k is a 15%-36% immediate return because of the pre-tax nature of the account. You’ll never miss the cash, and you’ll be glad you did it.
2). Unless you have an immediate life need that requires it, don’t be a seller now. Be patient. This too shall pass.
3). If you have available cash to invest, start dipping your toes in the water slowly and consistently. It might go down another 6-8%, or it might start turning around right away and start moving up. Don’t try to be perfect. You are just as likely to miss by waiting as you are by being early. Slow and steady.
4) there’s never a good time to buy a bad business. Don’t get sucked into buying something on a tip because it is “40% off it’s’ high” or some other random measure that has nothing to do with the fundamentals of the business. If you are going to buy, buy great businesses on sale.
Ok, a couple of companies I like a lot right now. American Express is trading at a 20% discount to forward earnings. They are very well run, have a solid balance sheet, and are reinvesting capital in next generation payment processing. Apple and Google are both trading at significant discounts to expected future earnings. Apple has supply chain exposure, for sure, but this outbreak hasn’t happened in a product launch cycle, so the effect is no where near as drastic as one might suspect. Google derives nearly all of its revenue from search, ads, and web services. Can anyone think of any reason at all why their business should be hurt right now? Are your searches up or down? Are companies adding or subtracting web capacity? In an election year, do paid ads go up or down? Google is my personal favorite right now.
Try not to stress too much. Go Cocks, beat Clemson!
