April 2020 – Random Thoughts on Recent Stock Market Events II

by Apr 25, 2020Memos0 comments

Don’t Rely on Your Future Market Predictions Too Much

The rush for commentary on the COVID-19 is out and many investors are publicising their perspective on the daily news that is being reported.  Some well known investors have claimed this is an opportunity of a lifetime.  Some have claimed that we still have much further to drop, with markets falling to new historic levels.  There are plenty of reasons to believe in both an optimistic and/or pessimistic forecast about the global economy’s future depending how you weigh the probability of certain events playing out in the next 6 months.

Market timing however is an impossible task for any investor to perform consistently well.  If there was any one person who could master this skill, they would be the richest person in the world through the compounding of their money by perfectly entering/exiting the market at the right moment.

However, if you consider yourself a stock picker and have determined the intrinsic value of a stock is 100% higher from where it is trading for today, then why would you wait to buy in fear that it could drop another 20%?  It is unlikely that you can perfectly time the bottom of each investment that you make. 

What you need to remind yourself is what your overall goal is for your portfolio.  Think back a few months when the market was hitting its all-time highs, when your goal was to achieve an 8-9% return over the next 10 years.  Well here we are with stocks having traded down close to 45% a short while ago from their 52-week high and then bouncing back to only being down 17%.  It is impossible to predict the future and you should not hesitate buying the stock you like just because you are not sure if it will go down lower.  If you thought that stock could get you 8-9% a few months ago, shouldn’t it get you a higher return now in the long run? 

There are a few exceptions to consider that could should change your thesis.  For instance, debt.  There will be many companies who will not survive this pandemic event due to debt and lease obligations which they will not be able to be met.  Some of these companies will have great long-term economics but if they can’t meet their short-term debt obligations it wont matter. Those are the downfalls of debt in the corporate (and the personal finance) world. As time goes on, every month that the shutdown continues, it will become increasingly difficult for even some very healthy companies to survive even if they have what was considered a very conservative balance sheet. 

So rather than trying to time the market it may make more sense for an investor to just not fully commit to any specific price point along the way.  Just as the most recommended strategy for the general public over the long term is to consistently average our their purchases of an S&P 500 linked ETF, it may make more sense to average cost your way through this period into the stocks you like rather than try to commit all at once.

For an investor who takes a more proactive approach to their portfolio, this strategy may not seem very attractive.  But what does it really take to get high performance? 

Investing Rules to Follow During a Crisis

Here are a few things to remind yourself of as we go through this crisis:

Adhere to your process – Going through a market crisis like this is like being a pilot of a plane and realizing the engine has stopped working.  The most important thing is to rely on your training manual, what you had trained for, to follow the process or checklist you had outlined when you were in a more stable mindset.  Whether your process is to continue to steadily buy a mix of ETF’s or it is to continually position your portfolio to have the highest assessed intrinsic value, now is not the time to change your process depending on what headline you read in the news.

Make fewer decisions – It shouldn’t really be that hard to beat the S&P index over the long term if you just invested in the index for a majority of your wealth and then managed to be patient enough to find an investment that you had researched, understood and were confident that would beat the index in the future.  I think investors really don’t think about their investing strategy like this however. The problem is that investors become far too impatient and attempt to overreach for a return that is far too aggressive for them.  Forcing yourself to make fewer decisions and only settle for the easy “one foot” hurdles is the key to long term success.

Margin of Safety – Ensure you apply plenty of margin of safety to account for any future debilitating events that may occur.  Our analyses are not always 100% accurate.  Even our best investments, which we think we know everything about; crazy things can still happen.  Who would have expected or planned for an event such as the COVID-19 pandemic?

Being selective – Be extremely selective of what you will and will not invest in.  In order to do well in a crisis, you have to hold tight to your process and not waver.  Hold tight to the conditions that you have established for your self and be selective about introducing new positions into your portfolio. While some stocks like Starbucks, McDonalds have fallen significantly from their all-time highs, they are still rather expensive stocks.  Don’t blindly go into buying anything in the market just because it has dropped a lot. 

To invest in stocks during times like these you have to be a believer that the future will be better than the present.  That we will in some way find our way through this existing crisis and that we will continue to be a better society and be more prepared for the next pandemic whenever/wherever that ends up being. Just as it paid off for people to believe in a more positive future after the financial crisis, world wars, cold wars and numerous other events where the future did not seem so bright. 

If you have any suggestions, comments or feedback that you would like to share feel free to email me at alex@StockWriteUps.com.


Enjoy the Journey,

Alex Middleton



Welcome to StockWriteUps.com!

My name is Alex Middleton and I am from Calgary, Alberta.  I believe investing requires one to carefully study publicly available information in an attempt to develop a thesis based on reason and logic.  It also requires one to properly account for the unknown by applying probabilities and margin of safety to their thesis.  I hope you enjoy the content!