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Amidst the Coronovirus (COVID) outbreak and the reality of it becoming a serious health emergency, here are answers to few key questions I have received from readers recently.
You won’t find perfect answers below, but this is just my attempt to help you get over your fears, which may otherwise lead you to act in haste, which can cause some damage to your process of long term wealth creation.
Let’s start right here.
1. What’s really bothering the markets?
I know you are smart and already know much. But still, here is my quick take on what’s bothering the markets.
Fears of slowdown in an already slow economy, and subsequent pressure on revenue and profits of companies, as China has almost closed its raw material supplies owing to COVID outbreak. China is the most critical part of the global supply chain, and if it sneezes (no pun intended), the economic disruption virus is bound to spread others, including India.
Slowdown in imports of raw materials and other inputs for a lot of industries, like pharma, textiles, electronics, automobiles, and plastics, has created constrains on domestic production. If the situation remains grave, and production remains muted, expect prices of finished goods from these and other industries to rise, thereby adding to inflation in the economy.
Consumers are anyways not spending as much as investors want them to spend. If inflation rises, and income growth remains low, expect pressure on corporate profits. Low profits mean low cash flows mean low reinvestments. All in all, this means continued weakness in stock prices.
2. How long would this continue?
Virus knows best. No one else has any idea, even if they say they have some idea, and especially when they say they have some idea.
3. Should I sell? Wait to sell? Buy? Wait to buy?
- Sell only if you expect long term cash flows of the company in your portfolio to deteriorate over time, not to time the market (like selling now buy when times are better)
- Buy only that stock – from within your portfolio or outside – if you expect long term cash flows of the company and its intrinsic value to improve considerably over the next ten years.
- Wait to sell or wait to buy only if you lack clarity now. Gather the clarity around your investments – existing and potential – first, then make the decision.
4. How do I survive this situation?
Before your portfolio, please take care of your health –
- Avoid handshakes, even if the other person has promised you a multibagger stock tip. Maintain at least three feet distance between yourself and anyone who is coughing or sneezing
- Wash your hands frequently with soap and water. That will not wash away your investment mistakes, but still
- How much ever you worry about your falling stocks, please avoid touching your eyes, nose and mouth
- If you have fever, cough and difficulty breathing, seek medical care early. That may not be because of falling stock prices.
As for your portfolio –
- Avoid doing anything that’s out of panic. Your stocks will fall when there is general panic all around. Even your good stocks will fall. But you don’t need to react, if there is no reason for you to act. Remember, well thought out inaction in investing is often the best action.
- Avoid trading, especially now when you may be confined to your home and have nothing to do. Don’t try to beat boredom by logging into your stock trading account.
- Don’t take Warren Buffett to the extremes by being overtly greedy just because others are fearful (accept that you are fearful too). Sometimes, there are genuine reasons to be fearful when others are. Don’t try to act contrarian just to look smart. Buy stocks only when you find value, not just because they have fallen in price or may be trading at their 52-week lows. Cheapness in price is not value.
- If you can wait with a part of your money, wait for better bargains as large investors bail out if the scare continues. Jason Zweig wrote in a recent post on WSJ – “When markets crumple, the culprits usually aren’t the smallest investors, but the biggest. So far, most individual investors have remained steadfast as stocks have been pummeled by fears that the coronavirus could turn into a pandemic. If they continue to keep their cool, small investors might even get to buy bargains as the big money bails out. Professional investors tend to move the fastest when a market suddenly turns. That’s largely out of self-preservation, because the biggest risk they face is being so out-of-step with the market that their clients fire them.”
5. Never thought a virus can pose such great risk to my portfolio!
Virus is NOT risk. It is an uncertainty. Learn to differentiate between the two please.
Risk is measurable, like the odds of winning on any roll of a fair dice. Uncertainty is not measurable. It is and unknown unknown.
Risk comes from not knowing what you are doing. Risk comes from looking to Mr. Market for advice instead of opportunities. Risk comes from focusing on the outcome (what will happen in the future) and not the process (what can I do now). Risk comes from acting like others are acting, and mindlessly. Risk comes from investing in fundamentally bad businesses when their stocks have fallen, especially when you start to believe their cheapness provides you value. Risk, ultimately, comes from focusing on return and not risk.
In short, YOU are the biggest risk to your investments, not COVID.
Human nature has not changed between these two times –
…so just manage the risk called YOU…like the virus that knows how to manage itself well.
6. Any lessons from history?
Near pandemics or epidemics (like SARS or Ebola) are like natural disasters. They curtail growth in the short term. But, over time, markets look through all this and to the long term cash flows and general health of the economy and businesses. But it’s times like these that are good reminders to make sure that you’ve got the right mix of equities, bonds, and cash for you and to stay invested. Basically, whether you have your asset allocation generally right.
Events like these tend to be temporary shocks (let’s hope so with COVID too), but eventually things do come back. History has ample proof that patience is generally rewarded.
7. I am so worried and unsure about what will happen! What should I do?
First, avoid rumor mongers, and avoid being one too – both on where the virus and the stock market is going.
Two, avoid reading much of the news for it may trigger panic attacks. If the virus must come to you, it will come. If your stocks must fall, they will fall. You just practice safe health habits and keep your calm. Only that’s in your control. Nothing else is.
Three, keep your investments in sound businesses and funds on. Don’t interrupt the compounding journey. Thankfully, in most cases, viruses have much shorter lifespans than the time you may have to compound. Don’t allow what you can’t do in the short term to impact what you can do in the long term.
Four, stop worrying at all. This, too, shall pass.
Five, not everything is so bad, and there is some good news –
- 7.5 billion people continue to live
- More people are living healthier and longer
- Most people’s standard of living continues to improve
- It’s never been easier to create wealth
- It’s never been so convenient to live
- Food has never been so abundant
- Education and entertainment have never been freer
- Shopping, healthcare, technology have never been better
- Searching for and finding your long-lost friends has never been easier
- Lots of things have never been cheaper
- We have abundance of options like never (career, business, food, entertainment, travel, everywhere)
- It’s never been easier to see the world
- It’s rarely been so peaceful, prosperous, and progressive
Life, and investing, can be made much simpler and less fearful than where we are today. We just need to know well, then choose well.