Stock markets are crashing, countries are trying to quarantine their way out of the Covid-19 crisis, oil prices drop more than 30% in a single day and what have I learned out of all this?
Be prepared for anything.
When it comes to the Covid-19 crisis, I am not familiar with anyone, who six months ago, would have thought that countries like Germany, Italy or the US would start quarantining people, close shops, borders and limit social gatherings and put curfews in place. I would also have not predicted the fact that toilet paper would be out of stock on Amazon or that simple dusk masks would sell for hundreds of dollars a piece.
Lesson learned: always have supplies and an emergency stockpile for at least two weeks.
When it comes to the market and investing, what have I learned?
You have stock prices of companies operating in different industry sectors (Software, Energy, Residential Property, Financial Services), in different continents (USA, Europe) rise 10% one day, drop 10% the next day and then shoot up again 10% the following day. I get it, the stock market is volatile, but this just goes to show how masses do not think rationally. I am not an expert here, but I don’t know how the fundamentals of a company that has been around for decades can do multiple 360° turns within a couple of days.
Lesson learned: markets, especially at times of crisis, are irrational. Best thing to do is sit back, watch the show and then average down if an opportunity arises.
This brings me to the next lesson learned. Its times like these that creates opportunities. And in order to take advantage of those, you need to have liquidity.
Lesson learned: never be invested all in. I know, Ray Dalio was saying cash is trash two months ago, but I do wish I had more cash now. A good example is Warren Buffet who is sitting on \$128 billion in spare cash.
I also want to point out that I need to be more careful when investing in energy stocks. No just because they are highly cyclical (gas in the winter vs gas in the summer) but also because a lot of them are highly leveraged. But I guess the most important thing here is the production cost. If oil is currently selling at \$30 a barrel and the cost of producing an additional barrel of oil costs US firms around \$50, that is certainly going to scream trouble for a lot of US oil producers when prices drop. Meanwhile the Saudis don’t even have to drill to pump out oil at the low cost of only \$15. This is especially critical, because investing in energy companies that operate on a thin margin is basically betting. Betting on the assumption that the Saudis are going to keep their word and not flood the market with crude in a bid to recapture market share.
Lesson learned: before investing in energy stocks, make sure that the company’s production costs are significantly lower than the costs of the competition and that a significant drop in gas or oil prices will still allow the company to make a profit. Don’t invest in overleveraged companies.
The next and probably most important lesson is, always do your own due diligence. You can subscribe to as many stock guru newsletters and YouTube channels as you want or get advice from your financial advisor. The key thing to remember is that, most of them are no experts and they will try to sell you hopes and dreams. They usually are over optimistic or over pessimistic and they will try to exploit your greed or fear.
Lesson learned: if you decide to follow someone’s investment advice, make sure that person has a proven track record and has skin in the game. If that person is handing out “free” advice, ask yourself why. If they try to sell you something be extra careful. Make sure you read the company’s financial statements and analyze the company yourself. Use those experts only to get ideas and inspiration.
Another important lesson learned is that don’t just buy the dip. Even if a stock’s price drops by 30%, 40% or even 50% don’t just buy it because you think it is cheap. First, the stock price might be dropping because of a good reason. Looking at some of the airline and energy companies now… they are in serious financial trouble and on the verge of bankruptcy. It doesn’t matter how far the price has fallen if the company is not going to be there next year. Another reason not to jump in and just buy the dip is because, even if the stock price drops 40% the company can still be overvalued. When this whole crisis started and the price of Microsoft stock was falling, some people I know rushed into “buying the dip”. The funny thing was… the stock was trading were it was trading only a month ago and continued to decline. They didn’t rush into buying the stock a month ago when it was trading at the same levels. Why the heck are they doing it now? It is typical pricing psychology. People would hesitate on buying something for \$80. Set the price to \$100 and stick a 20% discount tag on it and people will buy it. Even though the actual value of that item might be far less than \$80. Finally, don’t try to buy the dip all at once. It might fall even further. Instead average down.
Lesson learned: don’t rush into buying the dip.
Next, lesson. No emotions. If you cannot stand to see your portfolio loosing 50%, 60%, 80% or more of its value during a market crash then you probably should not be investing in stocks. You should be able to detach yourself emotionally from your investment decisions. If you cannot do that, then investing is not for you. Now, I am not saying you should ignore huge drops like that, feel free to reassess the intrinsic value of your holdings. And if your initial assessment (before the crash) was correct, dollar signs should be lighting up your eyes and you should be averaging down instead of selling in panic.
Lesson learned: you must be able to detach yourself emotionally from your investment decisions.
Overall, even though my portfolio’s performance is not so great during these times, I would say, for me, one positive outcome from all of this, is that I learned something. I have plenty of investing years ahead and I am glad I learned these lessons at an early stage of my investment journey.