“Is it time to invest or wait?”
This is a question that most all investors face many times in their investing life. With the markets currently at all-time highs, does it make sense to jump on the bandwagon and start investing? There is an old adage that says, “Buy low and sell high!” That makes most sense for investors, but the problem is that an investor never knows when is the low and when is the high. Unfortunately, no bells will ring at the bottom of a market or at the top. Let’s just look at this crazy year of 2020:
Feb-March: the markets and economy were doing very well and then along came the virus. The talk of closing the economy to “flatten the curve” caused the markets to nose-dive and everyone was asking where the bottom would be.
Listening to all of the pundits, some were saying ride out the storm while others were saying time to sell as this was unknown territory we were entering. Then others were looking at this as an opportunity but were uncertain as to when to start buying. Warren Buffett is famous for saying, “When investors are greedy, sell; and when investors are afraid, buy!” What did you do during this period?
Another alternative is to look at your overall investments that may include retirement accounts and personal portfolios. If you are contributing regularly from your pay into your employer sponsored retirement plan, you are actually doing a dollar cost averaging plan. So you would be buying into the market systematically in both up and down markets. This is a safe long-term strategy for building your retirement portfolio. You should never stop making these contributions if the market goes down sharply, as you would miss out on buying investments at lower prices.
April-May: Looking back and noting that the markets hit bottom on March 23.
How many individual investors bought stocks on that day? I cannot tell you for certain, but based upon historical numbers I can say very few. It is impossible to “time the markets,” but many computer programs have tried! For my own portfolios and having lived through the ups and downs of the markets over the past 40 years, I took a small portion of my portfolio and began buying shares of various companies around March 15, and then each week looked at what was happening and added to the positions over the next 8 weeks. This strategy paid off well. Of course, in hindsight, I wish I had bought all of the stocks that have gone up 50% or more from the low on March 23! But I did not. What I did do was look at companies that were greatly affected by the economic shut down, had strong balance sheets, would likely benefit from the recovery the fastest, and may have been considered contrarian at the time. In addition, I did add to some of my existing positions that were more broadly invested in various sectors, like Technology, Oil and Gas, and infrastructure.
This was a time to reflect on what was happening and what other industries or companies might actually benefit from the shut down and/or Covid-19. Several popped up in our minds, such as which companies could produce masks and ventilators the fastest, and the pharmaceutical companies vying for creating therapies and developing a vaccine. Beyond those obvious issues, what else might benefit going forward.
The hospitality sector has taken an incredible hit, and it will likely be a fairly long time before conventions are held in resorts. So, if people are going to travel, what are their alternatives? The airlines also took a major hit as well, and again, if businesses figure out that much of the business can be done without travel and people are not staying at major resorts, what are the alternatives? Surprise, a non-technology idea came to my mind; people will still want to travel, so they are going to travel by car or maybe travel in a RV so they can stay safe in their own environment. I also thought that if people were going to travel on the roads, which food/restaurant companies might benefit. McDonald’s would likely benefit, but what about a restaurant chain that focuses on the highways? Whenever I have been driving on the interstates, I always noticed that the Cracker Barrel restaurant parking lots were full! Would they recover faster than other chains that were more local? What about the RV sector? People are opting for their own RV instead of staying at hotels or Airbnbs.
You do not have to be a stock picker to be a successful investor. I think being aware of what is happening in the economy and acting on your own observations around you can have the greatest impact. Peter Lynch, the famed manager of the Fidelity Magellan Fund in the 1980s once said, paraphrasing: “Invest in what you know and be observant of your surroundings.”
Look at investing based upon your own knowledge, feelings and experiences, and observing what is happening in your world. A key to successful investing is simply to invest and do it systematically over your lifetime.
Get more information on learning to invest from the Brains team of experts.