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I’m seeing a lot of questions on social media about “Has the market bottomed?” or “What should I buy?”
Now more than ever, as the markets whip-saw, more and more people are paying attention as their investment and retirement balances are smashed 20%, 30%, some even more… all in the space of a month.
The speed of the market decline to form this bear market is unprecedented.
So of course, there are many folks, myself included who are sitting on the sidelines, champing at the bit, ready to charge in, and make a killing.
But I think we are all asking the wrong questions, or at least, looking in the wrong direction.
Because, it’s not whether the market has bottomed, or which stocks to buy, it’s… can I survive?
Let Me Explain…
Sure, stock prices look very attractive right now.
And yes, it is an incredible buying opportunity.
And of course, you have to be “in it to win it”.
But zoom out and take a look at the bigger picture.
Borders are closed, shops are shut, lockdown in progress, jobs will be lost.
How safe is your job?
And if you have a partner, how safe is hers/his?
There will always be buying opportunities, but defence is the best offence.
It is imperative to ensure that should something unfortunate happen and you drop down to one or zero income in the coming months, how much can you really invest?
That’s step one.
Determine Living Expenses
Have you worked out how much you need to live off if you have no income for the next 3, 6, 12 or however many months this Pandemic lasts?
Living expenses include your household, food, clothing, healthcare, transport and of course, rent/mortgage costs.
A common rule of thumb is to ensure 12 months of living expenses.
Here’s a cool calculator I found which calculates what an average two adult household living expense may be:
That’s almost $50k of savings you would need, just to last for another year.
And I’m sorry to say, but if you don’t have your living expenses covered first, jumping into the market is plain reckless in my opinion.
This is true with getting out as well. If you need cash in the short-term, don’t be too stubborn to “stay invested” and dig yourself further in the hole.
When To Go In?
So you’ve got the job security. Tick.
You’ve got your 12 months living expenses plus more tucked away. Tick.
What to invest in? Question mark.
When to do it? Even bigger question mark.
This is the trillion dollar question, or rather $3 trillion.
Not on IG, not on FB, not on TWT and definitely not on TT.
There are so many theories out there.
I have one too.
It’s why this bear market caught everyone by surprise.
Unknown, unknown risks is what causes the most disruption and uncertainty:
This is why there are so many opinions of the why, what, when and where – because we are “neither aware of, nor understand” COVID-19 when it struck.
Give Me Answers The Frugal Samurai!
OKOK fine, I can give you my opinion only.
There are two things I am on the look-out for as a sign when the market is bottoming.
One, the media.
I use the mainstream media as a contrarian signal – it’s actually remarkably effective.
I want the media headlines to scream doom and gloom, not on the Coronavirus, but on the financial markets (usually the stock market).
Back in the GFC of 2008-09 and Eurozone crisis of 2010-11, you had thought the financial world was ending tomorrow based on the front pages of the weekend editions. I haven’t seen it come out this time… yet.
Two, maximum fear.
At the risk of sounding a bit cold-blooded, maximum fear to me, will be at peak infection levels.
Don’t worry, you won’t miss it. Because you’ll be quivering every time you walk out your front door.
We’ve all seen the news reports of a packed Bondi Beach during a time of social distancing.
I think it was packed, because it hasn’t really affected people personally yet.
We only hear and read about it, so it seems foreign and distant.
It’s only when it touches you personally, that you realize you’re not invincible, and this makes you fearful.
Wait for that moment.
What To Go In?
Ahhh, the other half of the question.
I’d like to preface this and state that you could do a lot worse than buying market ETF’s (passive investing).
Because in the long-term the market has historically always bounced back, here’s the US S&P 500:
So depending on your investment horizon, in the long-run, even if you jump in today, you should do OK.
This differs of course, if this is your last working year and you were looking to enjoy a well-funded retirement… to that I say, it is time to seek professional advice and/or reassess your goals.
Anyhow, let’s say you wanted to pick individual shares, which one should you choose?
Similarly, there are a multitude of opinions on this.
Some have picked the healthcare, technology and biotech sectors to come out of this strongly.
Which is a fair call and one I am on board with.
But to answer this question, again I ask myself two questions.
One, “invert, always invert”.
Charlie Munger said it best, “Tell me where I’m going to die, so I don’t go there”.
This is the power of inversion.
Which is to think about things in reverse. Or to put it in another way, think backwards about what you don’t want to happen.
So if I had to apply inversion, the biggest consideration would be to avoid those stocks which will make me lose money.
Which means those stocks which cannot survive a downturn, through either low profit margins, high operating costs or a high debt level (most likely a combination of all).
Conversely, you could do a lot worse than invest in those stocks which have high profit margins, low operating costs and low debt (high cash) levels.
Two, permanent or temporary change?
The pandemic has caused cataclysmic changes to how a lot of companies operate.
The next big question would be, whether these changes will be permanent or temporary.
The travel, retail, food and hospitality industries have been smacked in the face HARD.
A lot of other firms are shifting the way they work for the future – with increased reliance on video conferencing and working from home arrangements.
Conversely, the panic buying and hoarding has seen toilet paper and hand sanitizer demand go through the roof.
The same can be said about supermarket buying.
And we’ve also seen many firms changing their production lines to start making ventilators (Nissan for one).
You’d have to think that when it all settles, there would be an abundance of toilet paper and ventilators going around (not the worse thing).
The key is to determine, if it’s a temporary shift, how quickly things can get back to where they were.
And if it’s a permanent shift, how successful the new strategy will be.
On Real Estate?
A quick aside on how Coronavirus will affect real estate values.
A lot of people are quick to point out that Australian Real Estate has traditionally held up well during recessions and market downturns.
But this time, I think there will be a detrimental impact.
Because real estate is about demand and supply.
And you can’t transact real estate without first seeing what you are buying.
And you can’t see what you are buying if you are scared of catching a virus with mortal consequences.
Oh, and that’s not even taking into account job uncertainty, economic downturn, and tighter household budgets.
Everything is sentiment driven.
Stay safe everyone!
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