Thursday, March 12, 2020

Ignore the Hysteria: Keep Calm and Invest On

Corona Virus Market Tank
When you approach the market with emotion, you're screwed.  Sudden drops aren’t reasons to jump ship.  As Buffet says, “Beware!” to the investor who cannot control his emotions.
The stockmarket took a nosedive this week, with falls so steep on Monday and Thursday they triggered a circuit breaker.  Trading momentarily stopped for fifteen minutes so traders could readjust to prevent further plummeting.

Thursday, in fact, was the single worst day The Dow has seen since 1987!  

The fear and uncertainty around the coronavirus clearly has rattled the nation.  

At the same time everyone's stockpiling Spam and toilet paper from Costco, they're also selling off their stock--presumably to hide the cash under the mattress.  

I’ve discerned some hysteria in the “financial advice” being touted in response to the plunge: consider the Atlantic article “The Stock Market is Tanking. Do Nothing”, where the author says “the principle of investing is to buy low and sell high” but gives the admonition to “do nothing” right now.  

The logical conclusion to her first statement, given the tank, is to buy right now!  (And just think about all the great stocks now selling at reasonable prices she completely ignores!) 

And so I think it’s a good time to reflect on the basics of investing.  As I just finished reading Warren Buffet’s annual letter to Berkshire Hathaway shareholders, I’ve excerpted this little gem, apropos to the moment. 
Anything can happen to the stock prices tomorrow.  Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater.  But the combination of The American Tailwind, about which I wrote last year, and the compounding wonders described by Mr. Smith, will make equities the much better long-term choice for the individual who does not used borrowed money and who can control his or her emotions. Others? Beware!
Keep Calm and Invest On
After the market plunge we’ve just seen, purchasing stock may seem as risky as placing your hard-earned money onto a roulette board.

Or that it requires clairvoyance: sure, it's easy to look back and see how an unforeseen event like this virus caused markets to tank, but without a crystal ball, how can I make good decisions going forward?

Investing isn't about luck or soothsaying, however.  It's about carefully researching companies and determining which will have long-term growth.

Drops in the market aren’t reasons to jump ship.  It’s easy to torture yourself by checking a stock every day and selling when the price dips, or to buy something impetuously determined to be a “hot stock”.  But as Buffet says, “Beware!” to the investor who cannot control his emotions.

In order to reap a good return, it’s necessary to hold onto an investment through the bear and bull markets.  An investor won’t reap the “compounding wonders” Warren mentions for at least ten years into the investment.

And stable companies (i.e., those with solid financials) with moderate growth make a far better bet than the hot stocks; that is, stocks with ultra-high P/E ratios.  (Or no P/E ratio at all, because the company's in the red--as is the case with Tesla, whose stock price skyrocketed earlier in the year.)

Dollar Cost Average
One methodical and lucrative approach to investing is called the Dollar Cost Average.  With this approach, an investor puts the same amount into the market every week or month, regardless of how the market is performing.

With Dollar Cost Average, you're investing in the idea that the market rises over the long-term, which historically has been the case.  (This is the “American Tailwind” that Buffet speaks of.)  This method prevents investors from trying to time the market and predict when it will rise and fall. 

Here is an hypothetical example of Dollar Cost Average.  Let's say an investor has $100 to invest each month.  In the first month, she purchases 10 shares of stock selling at $10 each for $100.  The next month, the share price falls to $5.  Rather than panic and sell, she invests another $100, and purchases 20 shares.  At this point, she own 30 shares.  The third month, the price increases to $20, and she purchases 5 shares.  She's now invested $300 and owns 35 shares, worth $525--a 75% return.  Not bad!

Although it's highly unlikely a stock price would be so volatile, this extreme example demonstrates how a methodical approach to investing yields a better return than buying into excitement and selling out of fear.

How does Dollar Cost Average apply right now?  

Here’s a personal example: last September I purchased stock in Disney for $135 a share.  Now the price has fallen to below $100.  Is this the time for me to sell?  Absolutely not!  As long as I’ve determined Disney is a sound investment (that is, strong financials, honest management and a promising industry), then I’m holding onto it for at least ten years.  And this plunge is an opportunity to score an even BETTER deal on a good stock--so maybe I’ll purchase more!*

This tank isn’t something to be panicked about, but rather an opportunity.

I’ve also have my eye on Target; in an earlier post I concluded its financials are sound, but that the P/E ratio was high (that is, the stock was expensive).  Well, now the price has dropped about $20 and is hovering below $100.  The P/E is much better now--just about 15.  Not a bad time to make a purchase!   

*This reasoning, btw, is for LONG TERM investments of ten years or more.  If I needed the money for CASH, pronto, I wouldn’t have invested it, so as to avoid being forced to sell during a slump like this and lose money.  I’m only investing extra-extra money I won’t need for twenty or thirty years down the pike (or EVER, even).

The great thing about Schwab (and other brokers) is that you can set a purchase to buy at a certain price: for example, if I want to buy Target at $90, then I can place that order, and my broker makes the purchase when and if it falls there. 

But I’m meandering.

It's a Bunch of Click-Bait
And…..there’s a little reflection on investing for ya.  After being injected with a healthy dose of fear, it’s vital to sober up and be reminded NOT TO PANIC!  

Cause when you approach the market with emotion, you're screwed.  

This virus will pass. 

As many have pointed out, including the POTUS, tens of thousands more people die from the flu every year than have died from this virus.  We’re simply victims to a media industry that profits from selling and propagating fear.

Don’t buy into it.  Opt out of the Costco lines.  But DO hit up your stockbroker to make some purchases!

What's your take?  Do you see any opportunities in the market amidst the virus panic?  

1 comment

  1. The stock market has been crazy!! I have a hard time going to the market and buying something I need for a regular living.. I am not even trying to stock up or anything, and I can't even buy eggs! We need to do our best to be mindful and this is a great time to buy unless the market continues to crash. The virus will definitely pass.

    Nancy ♥


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