Category: General Investing

This is a short article about important data you have to note if you’re reading broad economic conditions as a gauge for when to buy stocks. It was inspired by a recent question from a friend:

“While I understand that it’s impossible to time the market precisely, doesn’t it make sense to sell stocks and keep cash when you are fairly certain of a sustained economic decline (e.g. Covid)?”

During the 08/09 Great Financial Crisis, the S&P 500 in the US bottomed in early-March 2009. But interestingly, many stocks actually bottomed months before that, in November 2008. In The Good Investors, I have shared my investment theses for a number of US-listed companies in my family’s investment portfolio. Some of these companies were listed back in November 2008, and they include Netflix, Berkshire Hathaway, Amazon, Intuitive Surgical, MercadoLibre, Booking Holdings, and Mastercard.

The chart immediately below shows the share price changes from January 2008 to December 2009 for the individual stocks mentioned and the S&P 500. Notice the two red bubbles showing the time when most of the individual stocks bottomed (the one on the left) versus when the S&P 500 bottomed (the one on the right).

The individual stocks I talked about – Netflix, Berkshire, Amazon, Intuitive Surgical, MercadoLibre, Booking, and Mastercard – are companies that I think have really strong business fundamentals. They wouldn’t be in my family’s portfolio, otherwise! 

Now, let’s look at another chart, this time showing the US’s economic numbers from 1 January 2008 to 31 December 2010. The economic numbers are the country’s unemployment rate and GDP (gross domestic product). Notice the red bubble: It corresponds to November 2008, the time when most of the aforementioned stocks with strong business fundamentals bottomed. Turns out, the US’s GDP and unemployment rate continued to deteriorate for months after the individual stocks bottomed.

The observations I just shared have never been widely discussed, based on my anecdotal experience. But they highlight something crucial: It turns out that individual stocks – especially the companies with strong fundamentals (this is subjective, I know!) – can find a bottom significantly faster than economic conditions and the broader market do. 

The highlighted thing is crucial for all of us to note, in today’s investing environment. Over the next few months – and maybe even over the next year – It’s very, very likely that the economic data that are going to be released by countries around the world will look horrendous. But individual stocks could potentially reach a bottom way before the deterioration of economic conditions stops. If you miss that, it could hurt your portfolio’s long run return since you would miss a significant chunk of the rebound if you came in late.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

It’s great to learn from our own mistakes. But it’s even better to learn from those of others. COVID-19 has brought extreme market volatility and economic distress to the world. In a time like this, it’s easier for us to make investment mistakes.

I’m here to share the eggs I’ve had on my face in the stock market and what I’ve learnt from them, so that you can benefit from my errors. 

The backdrop

I started investing for my immediate family on 26 October 2010. The portfolio I help manage consists of stocks listed in the US market. There are currently over 50 stocks in it.

Some of the biggest losers in the portfolio include Atwood Oceanics, Ford (NYSE: F), Gilead Sciences (NASDAQ: GILD), GoPro (NASDAQ: GPRO), National Oilwell Varco (NYSE: NOV), Tapestry (NYSE: TPR), Under Armour (NYSE: UAA), and Zoe’s Kitchen.

Atwood Oceanics and Zoe’s Kitchen were privatised in October 2017 and November 2018, respectively, and I sold their shares on September 2016 and November 2018. I sold National Oilwell Varco in June 2017. I still own the other stocks mentioned.

Lesson 1: It’s okay to fail if you have the right investment framework 

My family’s investment portfolio has clearly had many epic losers. But from 26 October 2010 (the inception of the portfolio) to 29 March 2020, the portfolio has still grown in value by 16.0% annually, without including dividends. This is significantly higher than the S&P 500’s return of 10.7% per year over the same period, with dividends.

It’s okay to have multiple failures in your portfolio. There’s an investment framework that I’ve been using for my family’s portfolio for years. It has guided me towards massive winners, such as Netflix (NASDAQ: NFLX), Amazon (NASDAQ: AMZN), and MercadoLibre (NASDAQ: MELI). The winners in the portfolio have more than made up for the losers.

If you’re investing with a sound investment framework, then don’t beat yourself up too hard if some of your stocks are down big. Look at your performance from a portfolio-perspective, and not harp on how each position is doing.

Lesson 2: Diversify smartly, and stay away from commodity-related companies

Atwood Oceanics and National Oilwell Varco are companies in the oil & gas industry. When I invested in them, Atwood was an owner of oil rigs while National Oilwell Varco was supplying the parts and equipment that kept oil rigs running.

They were among my first-ever investments, back when I was a greenhorn in the stock market. I invested in them because I wanted to be diversified according to sectors. I also thought that oil & gas was a sector that is worth investing in since demand for the commodities would likely remain strong for a long time. My views were right, but only to a small extent. I was wrong on two important areas.

First, it is important to be diversified according to sectors (and geography too!). But there are some sectors that are just not worth investing in for the long run because their economic characteristics are poor. For instance, the energy, materials, and transport sectors have historically produced poor returns on invested capital. This is illustrated in the chart below from a 2006 McKinsey report which mapped out the average return on invested capital for various sectors from 1963 to 2004. Charlie Munger, Warren Buffett’s long-time lieutenant, once said:

“Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much different than a six percent return – even if you originally buy it at a huge discount.”

Second, demand for oil did indeed grow from 2010 to 2016. But oil prices fell significantly over the same period. The trends in oil consumption and oil prices for that period are depicted in the chart below.

The sharp fall in oil prices despite the rising demand illustrates the difficulty in predicting oil prices. In fact, it’s practically impossible. I recently learnt about a presentation that Peter Davies gave in 2007 titled What’s the Value of an Energy Economist? In it, he said that “we cannot forecast oil prices with any degree of accuracy over any period whether short or long.” Back then, Davies was the chief economist of British Petroleum, one of the largest oil & gas companies in the world.

With lower oil prices, the business results and share prices of Atwood Oceanics and National Oilwell Varco plummeted. The chart below shows National Oilwell Varco’s share price and earnings per share from 2010 to 2016 (data for Atwood Oceanics is not available since it’s now a private company). I think the predicament of Atwood Oceanics and National Oilwell Varco can be extrapolated to other commodity-related companies. It’s tough to predict the price movements of commodities; this in turn makes it difficult to have a good grasp on the business results of a commodity-related company over a multi-year period.

Lesson 3: Not selling the losers is as important as not selling the winners

You’ll notice that my family’s portfolio is still holding onto many of the big losers. The sales of Atwood Oceanics and National Oilwell Varco happened because of something that Motley Fool co-founder David Gardner shared a few years ago:

“Make your portfolio reflect your best vision for our future.”

Part of the vision I have for the world is that our energy-needs are entirely provided by renewable sources that do not harm the precious environment we live in. For this reason, I made the rare decision to voluntarily part ways with stocks in my family’s portfolio (referring to Atwood Oceanics and National Oilwell Varco).

I sell stocks very rarely and very slowly. This aversion to selling is by design – because it strengthens my discipline in holding onto the winners in my family’s portfolio. Many investors tend to cut their winners and hold onto their losers. Even in my earliest days as an investor, I recognised the importance of holding onto the winners in driving my family portfolio’s return. Being very slow to sell stocks – even the big losers – has helped me hone the discipline of holding onto the winners. And this discipline has been a very important contributor to the long run performance of my family’s portfolio.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

US airlines finally got something to cheer about.

Earlier this week, US senate leaders came to an agreement on a US$2 trillion stimulus bill. A whopping US$60 billion of that will be used to bail out struggling US airlines.

Airlines, in return, must forgo layoffs until the fall (sometime in the fourth quarter of 2020), accept limits on executive compensation and dividends, and maintain certain routes. Despite the limitations, I think this is a deal the airlines will happily take to save themselves from bankruptcy.

Bailouts are nothing new though. The US has a long history of bailing out companies that were deemed too important to fail. These companies either provided essential services, accounted for a decent chunk of the economy, or employed a large number of people.

But bailouts take different shapes and forms. The ways that the government injects cash into companies (or individuals), the kind of industries the government tries to save, and the impact on shareholders differ every time.

In light of the latest bailout, I decided to take a short trip down memory lane to see the different kinds of bailouts that have occurred.

The Great Depression

One of the greatest economic catastrophes of modern history occurred from 1929 to the early 1940s. It was the longest, deepest, and most widespread depression of the 20th century.

In 1933 US President, Franklin D. Roosevelt took the oath of office and started implementing solutions to bring the economy out of the recession. 

One of the things he did was to bail out struggling homeowners. At that time, the national unemployment rate was around 25%, so many Americans who lost their jobs were unable to pay off their home mortgages and were left homeless. 

The Home Owners’ Loan Corporation was set up to solve the problem. The newly formed government agency purchased defaulted mortgages from banks and refinanced them at lower rates, allowing about a million homeowners to benefit from lower mortgage rates.

This bailout was targetted at individuals at that time and kept people off the street. However, it was not until World War II ended that the depression was officially over and the post-war boom began.

The Great Financial Crisis

The next most important economic crisis occurred much more recently in 2007-2008. Known as the Great Financial Crisis, the collapse of Lehman Brothers amid the bursting of the housing bubble culminated in a global financial crisis.

However, this time, the US government’s response was swifter and the bailouts introduced saved banks, restored confidence, allowed banks to lend again, and eventually led to the 12-year bull market that ended this year.

So what did the US government do in 2008? The Emergency Economic Stabilisation Act of 2008, often called the “bank bailout,” was signed into law by then-President George W. Bush. The new law led to the creation of the US$700 billion Troubled Asset Relief Program (TARP) to inject capital into banks. But these funds were not given as grants, rather they were used to purchase toxic assets from the banks.

A key part of the US federal government’s plan was to buy up to US$700 billion of illiquid mortgage-backed securities. These were essentially a bundle of home loans packed into one.

On top of that, the US government injected cash into banks through the purchase of preferred stock. Citibank needed a particularly big injection of capital, with the government purchasing US$45 billion in preferred and common Citigroup stock. Selling stock when your share price is down 80% is never going to be pretty and Citigroup shareholders learnt that the hard way as they were diluted almost six-fold. Till today, Citigroup’s share price is still more than 80% off the high it reached in 2007. However, what the bailout achieved was to save Citigroup from insolvency and shareholders could at least survive to fight another day.

Overall, TARP improved the balance sheet and reduced the potential losses of banks and financial institutions.

The net effect for the government was also positive as it was reported that TARP recovered US$441.7 billion of US$426.4 billion invested, earning a US$15.3 billion profit when everything was done and dusted.

COVID-19 Crisis

Fast forward to today and we are once again seeing a massive bailout, this time with the aviation industry.

As mentioned earlier, struggling US airlines are getting an early Christmas present this year, to the tune of US$60 billion.

According to a draft of the legislation, airlines will receive up to US$25 billion in direct grants. That’s practically free money for the airlines as long as they promise not to layoff workers till the fourth quarter of 2020, accept limits on executive compensation and shareholder dividends.

Additionally, the bill also grants US$25 billion in loans and loan guarantees for passenger airlines and US$4 billion for cargo air carriers. The promise of loans will help struggling airlines raise much needed new capital even if the banks won’t lend to them.

The news is, of course, great for shareholders and employees. Employees get to keep their jobs while shareholders don’t have to worry about potential bankruptcies. The injection of cash will tide airlines through this challenging period. Airline shares have been creeping up since rumours of a bailout began.

The Good Investors’ conclusion

Bailouts may seem like a bad word but they are great for shareholders. The injection of cash into a company can tide them through when all hope seemed to be lost.

However, bailouts also bring to light that the company was not managing its finances well enough. Overleverage, bad investments, and in the case of Airlines, overspending on share buybacks destroyed their balance sheets to the brink of collapse.

Although bailouts can eventually save the day, they are one-off special situations and investors should never rely on them to get them out of trouble.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Freediving is the sport of diving underwater that relies on holding our breath without any breathing apparatus. Professional freedivers have been known to descend to depths of 100 metres or more on one single breath. It’s truly a sight to behold on what the human body can achieve.

I went to a freediving trial a few years ago in a deep swimming pool in Singapore. During the session, I was taught that when we hold our breath, a long gap actually exists between the time when our urge to breathe kicks in and the time when we actually do need to breathe. The information was interesting to me, so I’ve remembered it till now.

A few days ago, I went for a swim in the morning. While swimming, I tried extending the number of breast-stroke repetitions I could do while underwater. But try as I might, I couldn’t. I knew, logically, that my body would not be physically harmed even if I continued holding my breath for an extended period of time after the urge to breathe kicks in. But the urge was too strong. Each time it appeared, I gave in to it after a few short seconds. I couldn’t fight the visceral urge. After I stopped my swim, a light bulb went on in my head. I saw a link between investing and freediving.

Freediving requires us to fight the visceral urge to breathe when holding our breath. But it is difficult to do so, even if we have all the right analysis and understand the logic. I knew I would be fine and that my body did not have to breathe at that instant. But my body was screaming at me to surface from the water and take in some air.

Investing requires us to fight the visceral urge to capitulate when bear markets inevitably occur. But it is difficult to do so even if we have all the right analysis and understand the logic. Our brains will be screaming at us to sell when stocks are falling, even if we understand that we are going to be fine over the long run just leaving our portfolios as they are (assuming they were well-constructed from the start).

So what can we do?

We can train our bodies to hold our breath for long periods of time – there are well-documented methods.

I don’t know what the solution is for investing. But I’m hopeful that those of us who are susceptible to panic during bear markets can find some relief if someone can provide an empathetic listening ear and useful context when they occur. The current volatility in stocks – because of fears over the coronavirus, COVID-19 – means that many of us are likely enduring our brains screaming at us to sell. I want to help.

I have a long article sharing the useful context. The Singapore-based roboadvisor Endowus also put out a wonderful video recently sharing even more context. You can contact me at thegoodinvestors@gmail.com too. I cannot give financial advice, but I can perhaps help you deal with your investing-related emotions in a more constructive manner. You’re not in this alone.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

We are currently in the midst of the fastest ever bear market in history. We live in uncertain times. No one knows how long the COVID-19 outbreak will last and what is the depth of its near-term economic implications. 

Across the globe, sporting events have been postponed, numerous gyms and schools are closed, and travel restrictions have been imposed. All of which will reduce expenditure and have a very real impact on corporate earnings and the economy.

Our foreign minister, Dr Vivian Balakrishnan, recently reminded everyone to be vigilant and that the economic implications would last at least a year. 

Even the emergency rate cut by the Fed on Sunday to bring interest rates to 0%, and the announcement of US$700 billion in quantitative easing, failed to spark any enthusiasm in the stock market. The S&P 500 in the US closed with a 12% fall in the wee hours this morning. At home, the Straits Times Index was down 5.25% on 15 March 2020.

In these dark times, I thought it would be a good idea to outline my gameplan to survive this and future market downturns.

Only invest the money I don’t need for the next five years

Stocks are volatile. That’s a fact we can’t escape. This is not the first bear market and certainly not the last.

My blogging partner, Ser Jing, shared some interesting stock market facts in an earlier article. He wrote:

“Between 1928 and 2013, the S&P 500 had, on average, fallen by 10% once every 11 months; 20% every two years; 30% every decade; and 50% two to three times per century. So stocks have declined regularly. But over the same period, the S&P 500 also climbed by 283,282% in all (including dividends), or 9.8% per year. Volatility in stocks is a feature, not a bug.”

Steep drawdowns are bound to happen and investors need to be able to ride out the paper losses and not be forced to sell.

Stocks can take months, if not years, to recover from a bear market. There have been 12 bear markets since World War II. These bear markets have taken two years to recover on average. The longest bear market occurred in the aftermath of World War II and took 61 months to recover.

Given the frequency of bear markets and the time taken for stocks to recover, I only invest money that I do not need for at least five years. Being forced to sell in a bear market could be detrimental to my returns and net worth over the long term.

Don’t leverage

Leverage can kill your portfolio in a bear market.

Leveraging essentially means borrowing to invest – or investing more than you can afford. The case for leveraging is that if you can borrow at let’s say 5% but have a return of 10%, then you can earn the difference.

However, there is one major pitfall to leveraging to invest in stocks- margin calls. If the value of your stocks falls below a certain threshold, brokerages who lend the money will force you to sell your stocks to ensure that you can pay them back.

During the Great Depression, the US stock market fell by 89.2% from top to bottom. If you had invested on margin, you would have likely been forced to liquidate your investments to pay back your lender.

Your entire portfolio would have gone to zero. That’s the danger of margin calls. Even though stocks eventually recovered, stock market participants who leveraged could not participate in the rebound and subsequent bull market.

The Great Depression was the steepest decline we’ve seen. But there have been other notable bear markets that would have likely caused margin investors to be completely wiped out. The Great Financial Crisis of 2008 saw a 53.8% peak-to-trough decline in US stocks, while the 1973-74 crash had a peak-to-trough decline of 44.9%.

Investors who invest with margin can gain some extra returns on good years but can easily be wiped out on the next downturn.

Invest in companies that can survive a downturn

I also invest only in stocks that can survive an economic downturn. Companies that have strong balance sheets with more cash and debt are likely to be able to weather the storm. 

Most companies, no matter how strong their moat is, will likely see a fall in sales over the next few months. Even companies like Netflix, which on the surface seem unaffected by the COVID-19 outbreak, might see revenue fall as consumers are more conscious about their spending habits.

In a time like this, when companies are facing disruption to sales, it is important that we only invest in those that are able to service their debt, continue paying their fixed costs ,and still come out at the end of the tunnel.

Warren Buffett described it best when he said,

“Only when the tide goes out do you discover who’s been swimming naked.”

It is in times like these when companies that are over-leveraged and have high-interest cost may end up going underwater. Shareholders of these companies will be left grasping at straws.

The Good Investors’ conclusion

The stock market is a great place to build wealth over the long run. However, it is important that we abide by certain investing principles that help us survive a market meltdown, as we are seeing unfold in front of us.

These three simple rules help me keep calm during these dark times, knowing that this too shall pass.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Stocks around the world have been incredibly volatile in recent weeks because of the new coronavirus, COVID-19. All over the world, business activity has slowed, large-scale gatherings of people have been cancelled, planes are grounded, hotels are empty, people are quarantined, and healthcare systems are pushed to their limits. Recessionary fears are also rampant.

Amidst the market and societal turmoil, I want to share some important investing-related reminders for all of us to provide context, soothe fraying nerves, and be a voice of calm, reason, and peace.

But before I get there, I want to stress this: COVID-19 or no COVID-19, recession or no recession, I am not changing the way I am investing. Regardless of how COVID-19 or the global economy develops, the stock market is still a place to buy and sell pieces of a business. This also means that a stock will do well eventually if its business does well. So I will continue looking for companies that excel according to my investing framework, and investing in their shares for the long run.

On to the update…!

1. Recessions are normal

The chart below shows all the recessions (the dark grey bars) in the US since 1871. You can see that recessions in the country – from whatever causes – have been regular occurrences even in relatively modern times. They are par for the course, even for a mighty economy like the US.

The following logarithmic chart shows the performance of the S&P 500 (including dividends) from January 1871 to February 2020. It turns out that US stocks have done exceedingly well over the past 149 years (up 46,459,412% in total including dividends, or 9.2% per year) despite the US economy encountering numerous recessions. If you’re investing for the long run, recessions can hurt over the short-term, but they’re nothing to fear.

2. The stock market has regularly seen serious short-term losses while on its way to earning great long-term returns

Between 1928 and 2013, the S&P 500 had, on average, fallen by 10% once every 11 months; 20% every two years; 30% every decade; and 50% two to three times per century. So stocks have declined regularly. But over the same period, the S&P 500 also climbed by 283,282% in all (including dividends), or 9.8% per year. Volatility in stocks is a feature, not a bug.

In fact, stocks have also experienced brutal one-day drops that – with the proper perspective – turn out to be blips.

Some market commentators have labelled 9 March 2020 as Black Monday because the S&P 500 fell by 7.6% that day. But that is nothing compared to the historical Black Monday – on 19 October 1987, the S&P 500 plunged by 20.5%. To make matters worse, the index was already down by 10.1% in the three days preceding 19 October 1987. So in four trading days – from the close on 13 October 1987 to 19 October 1987 – US stocks were down by 28.5% in all.

Black Monday (the historical one) was a harrowing experience for those who lived through it. But here’s the thing: From 13 October 1987 (before Black Monday happened) to 9 March 2020, the S&P 500 was up by 773% in total, or 6.9% per year. With dividends, the S&P 500 was up by around 2,100%, or 10.0% annually.

From an individual stock perspective, we can also look at the US e-commerce giant Amazon (NASDAQ: AMZN). The company (which is in my family’s investment portfolio) was a massive long-term winner from 1997 to 2018, with its share price rising by more than 76,000% from US$1.96 to US$1,501.97. But in the same timeframe, Amazon’s share price also experienced a double-digit top-to-bottom fall in every single year (the declines ranged from 13% to 83%).

One of my favourite finance writers is Morgan Housel. In an April 2019 blog post, he brilliantly articulated a concept that I’ve held in my mind for a long time: Instead of seeing short-term volatility in the stock market as a fine, think of it as a fee for something worthwhile. The stock market has produced good to great returns over the long-term. But it demands an admission fee. And the admission fee is what we’re currently experiencing.

3. Recessions and market crashes are inevitable

The late Hyman Minsky was an obscure economist when he was alive. But his ideas flourished after the Great Financial Crisis of 2007-09.

That’s because he had a framework for understanding why markets and economies go through inevitable boom-bust cycles. According to Minsky’s then radical view, stability itself is destabilising. When an economy is stable and growing, people feel safe. And when people feel safe, they take on more risk, such as borrowing more. This leads to the system becoming fragile.

The same goes for stocks. Let’s assume that stocks are guaranteed to grow by 9% per year. The only logical result would be that people would keep paying up for stocks, till the point that stocks become way too expensive to return 9% a year. Or people will take on too much risk, such as taking on debt to buy stocks.

But bad things happen in the real world and they happen often. And when stocks are priced for perfection, bad news will lead to lower stock prices.

4. There is always something to worry about

Peter Lynch, the legendary manager of the Fidelity Magellan Fund from 1977 to 1990, once said that “there is always something to worry about.” How true. The table below, constructed partially from Morgan Housel’s data, shows that the world had experienced multiple crises in every single year from 1990 to 2019.

But over the same period, US stocks were still up by nearly 800% after factoring in dividends and inflation.

COVID-19 is not the first deadly disease outbreak the world has faced. But global stocks have registered solid long-term gains despite multiple occurrences of epidemics/pandemics in the past. The chart below shows the performance of the MSCI World Index (a benchmark for global stocks) from 1970 to January 2020 against the backdrop of the various epidemics/pandemics we’ve experienced in the past 50 years.

5. Don’t invest in stocks with money that you will need within five years, at least; also, don’t use leverage

When I was helping to run the Motley Fool Singapore’s investment newsletters, my ex-colleagues and I repeated the same message over and over again: You should not invest with money that you need within the next five years.

The message is meant to prepare for days like we’ve seen over the past few weeks. The worst thing that can happen to us as investors is to be placed in a position where we’re forced to sell stocks. It doesn’t matter if we’re forced to sell when stock prices are high. But it can be disastrous to be forced to sell when stock prices are low.

To reap the rewards of long-term investing, we need to give ourselves holding power. And a very simple but effective thing we can do to gain holding power is to invest with money that we would very likely not need to touch for a good number of years.

Another simple but effective way we can have holding power in the financial markets is to not use leverage. Investing with leverage is to invest with borrowed capital. If we invest with leverage, we could very easily become forced-sellers when stocks fall. This becomes a severe headache during occasions when stocks fall sharply, such as over the past few weeks. 

6. Volatility clusters

As mentioned earlier, the S&P 500 fell by 7.6% on 9 March 2020. The decline was so severe it triggered a circuit breaker in the process. On 10 March 2020, the prominent US market benchmark jumped 4.9%. A great day in the market followed a bad day.

This clustering of volatility is actually common. Investor Ben Carlson produced the table below recently (before March 2020) which illustrates the phenomenon.

The clustering means that it’s practically impossible to side-step the bad days in stocks and capture only the good days. This is important information for us, because missing just a handful of the market’s best days will destroy our returns.

Dimensional Fund Advisors, which manages more than US$600 billion, shared the following stats in a recent article:

• $1,000 invested in US stocks in 1970 would become $138,908 by August 2019
• Miss just the 25 best days in the market, and the $1,000 would grow to just $32,763

So it is important that we stay invested. But this does not mean we should stay invested blindly. Companies that currently are heavily in debt, and/or have shaky cash flows and weak revenue streams are likely to run into severe problems if there’s an economic downturn. If a global recession really happens this time (it looks increasingly likely that it will) and our portfolios are full of such companies, we may never recover. It’s good practice to constantly evaluate the companies in our portfolios, but I think there’s even more urgency to do so now.

7. Stick with high-quality businesses – don’t be attracted to a stock just because it has a low valuation

It’s easy for us to be lured by stocks that have low valuations after sharp declines in their prices. But it’s crucial that we also pay attention to the quality of the underlying businesses of the stocks we’re looking at. Low-quality businesses can’t compound in value. If we invest in them, our investments can’t grow over time. We may even lose money.

My friend Chin Hui Leong is a whip-smart investor and the co-founder of The Smart Investor, an investment education website. On 5 May 2009, he invested in American Oriental Bioengineering (AOB), a China-based pharmaceuticals company that was listed in the US. Chin was attracted to its low valuation – back then, AOB’s price-to-earnings ratio was only 7.

The S&P 500 reached a bottom during the Great Financial Crisis in March 2009 (it hit 677 points) and has nearly quadrupled since. So the timing of Chin’s investment in AOB was great. But he went on to effectively lose his entire investment in the company over a few short years because of its poor business performance subsequently. From 2009 to 2013, AOB’s revenue shrank from US$296 million to US$122 million while its US$41 million in profit became a loss of US$91 million. A cheap stock can easily become a big loser if its business does poorly.

Chin also has a fantastic and inspiring example of what can happen if we stick with high-quality businesses. He invested in Netflix (NASDAQ: NFLX) (my family also owns shares of Netflix) on 12 January 2007 at a share price of around US$3.20. On this occasion, his timing was poor. The S&P 500 closed at 1,431 on the day of his Netflix investment and reached a peak of 1,565 on 9 October 2007 before the Great Financial Crisis hit. But today, Netflix’s share price is around US$330, about 100 times higher than when he first invested. 

8. Oil prices are low now, but we still shouldn’t buy oil & gas stocks indiscriminately

There are two widely-tracked prices for oil: West Texas Intermediate (WTI) crude and the international benchmark. Brent crude. Both shockingly fell by more than 30% each on 9 March 2020 at their respective low points.

WTI eventually closed the day with a 24.6% decline to US$31.13 per barrel while Brent crude settled with a 24.1% slide to US$34.36 per barrel. These prices were the lowest seen since February 2016. Some market observers have linked this sharp fall in oil prices to the recent turmoil in financial markets that we are seeing.

The lower oil prices have also caused the share prices of oil & gas stocks around the world to plummet. In the US market, Exxon Mobil (NYSE: XOM) plunged by 12.2% on 9 March 2020. Meanwhile, at our home in Singapore, Keppel Corporation (SGX: BN4) fell by 9.6% while Sembcorp Marine (SGX: S51) was down by 11.4%.

Oil prices are near multi-year lows now – they were around US$100 in 2014 and around US$32 at the moment. It could thus be tempting to pick up oil & gas stocks with the view that their share prices will tag along when oil prices rise. There are two problems here.

First, it’s practically impossible to forecast future oil prices. In 2007, Peter Davies gave a presentation titled What’s the Value of an Energy Economist? In it, he said that “we cannot forecast oil prices with any degree of accuracy over any period whether short or long.” Back then, Davies was the chief economist of British Petroleum, one of the largest oil & gas companies in the world.

Second, oil prices and oil & gas stocks can move in opposite directions. In mid-2014, oil prices started their rapid descent from around US$100. WTI reached a low of US$26.61 in February 2016. 10 months later (on 21 December 2016), WTI had doubled to US$53.53. But over the same period, 34 out of a group of 50 Singapore-listed oil & gas stocks saw their share prices fall. The average decline for the 50 companies was 11.9%.

There can be many obstacles that stand between a positive macrotrend and higher stock prices. In the case of oil & gas stocks, these include a weak balance sheet and deteriorating business fundamentals as a result of poor operational capabilities.

9. We will get through this 

There are 7.8 billion individuals in our globe today, and the vast majority of us will wake up every morning wanting to improve the world and our own lot in life – COVID-19 or no COVID-19. This motivation is ultimately what fuels the global economy and financial markets.

Miscreants and Mother Nature will occasionally wreak havoc. But we should have faith in the collective positivity of humankind. We should have faith in us. We can clean up the mess. To me, investing in stocks is the same as having faith in the long-term positivity of mankind. I continue and will continue to have this faith, so I continue and will continue to invest in stocks.

I want to leave the last words in this article to Morgan Housel. A few days ago he published a blog post with the most apt of titles: We’ll Get Through This. In it, he wrote:

“Remember that when progress is measured generationally, results and performance should not be measured quarterly.

It looks bad today.

It might look bad tomorrow.

But hang in there.

We’ll get through this.” 

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Yesterday, I published Staying Calm Through The Recent Big Fall In Stocks. In the article, I shared how US stocks fell by a stunning 20.5% in one day on 19 October 1987. This event is now infamously known as Black Monday.

I used Black Monday as an example to show that incredibly sharp short-term declines have happened in the past. Yet, US businesses and the stock market as a whole have continued growing significantly. I thought Black Monday was an apt example, given the current climate – on Monday night (9 March 2020), US stocks declined by 7.6%.

In Staying Calm Through The Recent Big Fall In Stocks, I wrote that “when Black Monday occurred, it was likely an extremely stressful time for investors.” I could not find any data or anecdotes to illustrate how investors must have felt back then. As the market gods would have it, I just found one.

Ben Carlson once received a message from a reader who experienced Black Monday. Carlson is the Director of Institutional Asset Management at Ritholtz Wealth Management who blogs at A Wealth of Common Sense. This is what the reader wrote to him (italics are mine):

“As one who was actually invested in 1987 (and since 1973), I still have vivid memories of that market crash. It is oh-so-easy to look today at a long-term chart having a tiny blip and say “So what! . . . of course the market recovered . . . those who sold were fools.”

In 1987, market news was nothing like it is today. We had no Internet. We had the next day’s WSJ [Wall Street Journal] and Friday’s 30-minute Lou Rukeyser’s Wall Street Week; we subscribed to a few stock newsletters (delivered by snail mail) and Kiplinger and Money magazines . . . that’s about it.

Therefore, though I heard about the crash on the radio as I drove home from work on Black Monday, I was not prepared to find my wife in tears . . . her first words were “You’ve lost our retirement!” (Reading it does not convey the impact of hearing it.)

In real time, the crash was a VERY big event. Fear for a changed future was the natural response. Talking heads were saying “This worldwide event could last for years; our children will have a lower standard of living than we have.”

Long story short— she insisted we sell everything the next day (which was also a significant down day); we eventually re-entered the market.”

I can’t prove it, but I guarantee that many investors are today having similar thoughts as what I highlighted in the quote above. It was fortunate that Carlson’s reader eventually re-entered the market. Black Monday turned out to only be a painful blip in the short run (see chart below). From 13 October 1987 (before Black Monday happened, meaning stocks were at a higher price than after the 19 October 1987 crash) to 9 March 2020, the S&P 500 increased by 773% in total, or 6.9% per year. With dividends, the S&P 500 was up by around 2,100%, or 10.0% annually, according to data from Robert Shiller.

Black Monday was monumental for those who lived through it. But if those investors had the courage to stay invested, they would have been amply rewarded.

What we experienced on Monday night and for the past few weeks, feels similar to what Carlson’s reader described. But I also think the chances are very high that in five, 10, and 20 years from now, we will look back on our experiences in the past few weeks and think “What a time it was to live through. But I’m glad I stuck with stocks for the long haul!”

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

Yesterday night, the S&P 500 in the US swiftly fell by 7% when the market opened, triggering a circuit breaker that halted trading activity for 15 minutes. The index resumed trading, but eventually registered a drop of 7.6% for the day.

The decline in US stocks was sharp and it likely had hurt some investors, if not psychologically, then literally (because of fear-induced selling, or the activation of stop-losses). Some of you are also likely worried about what could happen next.

History is and will never be a perfect guide for the future. But a look at the past can give us context on what just happened and prevent us from committing emotion-driven mistakes.

19 October 1987 is known as Black Monday in the investing community. That’s because the S&P 500 fell by 20.5% on that day alone. What deepened the pain was that the US stock market index had already declined by 10.1% in the three days preceding Black Monday. So in the span of four trading days, from the close on 13 October 1987 to 19 October 1987, the S&P 500 sunk by a mighty 28.5% in total.

The chart above illustrates how brutal Black Monday was. But for another perspective, the chart below shows how the S&P 500 did from 13 October 1987 to 13 October 1992, a five-year period. It was up 30% in all. Not fantastic, but there was still a gain. 

Let’s zoom out even further, with a chart that shows the performance of the S&P 500 from 13 October 1987 to today:

Turns out, the S&P 500 has climbed by 773% in total, or a solid 6.9% per year.

I have two points to make here. First, significant short-term declines in stocks have happened before. When Black Monday occurred, it was likely an extremely stressful time for investors [link added on 11 March 2020]. But the sun still rose and the world went on. According to Robert Shiller’s data, the S&P 500’s earnings per share (EPS) has also compounded at 6.9% per year from October 1987 to today. In fact, the S&P 500’s EPS in December 1987 was higher than it was in October 1987 (US$16.41 vs US$17.50). And if the S&P 500’s dividends were included, the index’s return from October 1987 to today would have been around 10% per year, based on Shiller’s data.

The second point is that we need to separate business performance – especially long-term business performance – from stock price movements when investing. As I just mentioned, US businesses were growing (in the form of higher EPS) despite Black Monday’s occurrence, and continued to grow over the long run. Yesterday night’s 7.6% fall in the S&P 500 was driven by a slew of factors, with one of them being fears related to the new coronavirus, COVID-19. I described some of the virus’s negative impacts on business conditions worldwide in a recent article:

“Global corporate giants such as Apple, Visa, and Mastercard have warned of pressures to their businesses because of COVID-19 (see here, here, and here). Airlines are some of the worst-hit groups of companies, with UK airline Flybe entering bankruptcy earlier this month; last week, Southwest Airlines in the US warned of a “very noticeable, precipitous decline in bookings.” In China, the PMI (purchasing managers’ index) for February 2020 came in at 35.7, the lowest seen since tracking began in 2004 (a reading below 50 indicates a contraction in factory activity). In 2008 and 2009, during the height of the Great Financial Crisis, China’s PMI reached a low of 38.8. ”

So yes, there’s a very real threat to the short-term health of many businesses because of COVID-19. But will the virus have any lasting negative consequences over the long run? It’s possible, but I think it’s unlikely. I’m not alone. During an interview with CNBC late last month, billionaire investor Warren Buffett shared his thoughts on how investors ought to be dealing with COVID-19. He said (emphasis is mine):

“Look, the tariff situation was a big question market for all kinds of companies. And still is to some degree. But that was front and center for a while. Now coronavirus is front and center. Something else will be front and center six months from now and a year from now and two years from now. Real question is — where are these businesses gonna be five and ten and 20 years from now? Some of them will do sensationally, some of them will disappear. And overall I think America will do very well — you know, it has since 1776…

…We’ve got a big investment in airline businesses and I just heard even more flights are canceled and all that. But flights are canceled for weather. It so happens in this case they’re gonna be canceled for longer because of coronavirus. But if you own airlines for 10 or 20 years you’re gonna have some ups and down in current. And some of them will be weather related and they can be all kinds of things. The real question is you know, how many passengers are they gonna be carrying 10 years from now and 15 years from now and what will margins be and– what will the competitive position be? But I still look at the figures all the time — I’ll admit that…

…[Coronavirus] makes no difference in our investments. There’s always gonna be some news, good or bad, every day. In fact, if you go back and read all the papers for the last 50 years, probably most of the headlines tend to be bad. But if you look at what happens to the economy, most of the things that happen are extremely good. I mean, it’s incredible what will happen over time. So if somebody came and told me that the global growth rate was gonna be down 1% instead of 1/10th of a percent, I’d still buy stocks if I liked the price at which — and I like the prices better today than I liked them last Friday…

… We’re buying businesses to own for 20 or 30 years. We buy them in whole, we buy them in part. They’re called stocks when we buy in part. And we think the 20- and 30-year outlook is not changed by coronavirus.”

But not every company is facing the same level of long-term risk because of COVID-19. Some companies are at higher risk of failing or having their health permanently impaired. These are companies with debt-laden balance sheets, lumpy revenues, and an inability to generate healthy free cash flows. Such companies have always faced a higher level of existential risk compared to companies with healthy balance sheets (that have minimal or reasonable levels of debt), recurring revenues, and strong free cash flows. But COVID-19 has raised even more questions on the survivability of the former group because of the intense short-term hit to business conditions worldwide.

We always need to tread carefully with the types of companies we invest in – more so today. But there’s no need to panic. Fear could be the biggest contributor to our investing-losses, even more than actual risks.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

I started a recent article with the sentence: “It’s an understatement to say that stocks have been volatile of late.”

From 14 February 2020 to 8 March 2020, the S&P 500 in the US has declined by 12.1%. I mention the US stock market because it is by far the largest in the world. I’ve never thought it makes sense to find reasons for the short-term movements of stock prices. But I think it’s pretty clear that the coronavirus, COVID-19, is the key reason for the declines seen in recent days.

The number of people who are infected with COVID-19 has been rising significantly, with the death toll tagging along. The virus is also making its way into more countries over time.

Global corporate giants such as Apple, Visa, and Mastercard have warned of pressures to their businesses because of COVID-19 (see here, here, and here). Airlines are some of the worst-hit groups of companies, with UK airline Flybe entering bankruptcy earlier this month; last week, Southwest Airlines in the US warned of a “very noticeable, precipitous decline in bookings.” In China, the PMI (purchasing managers’ index) for February 2020 came in at 35.7, the lowest seen since tracking began in 2004 (a reading below 50 indicates a contraction in factory activity). In 2008 and 2009, during the height of the Great Financial Crisis, China’s PMI reached a low of 38.8.

We’re clearly in an environment now where stocks are volatile and the world is grappling with a public health crisis and recessionary fears. Many of you are likely wondering what you should be doing now with your investment portfolios. If you invest in stocks, I think there are five questions you should always ask yourself. But they are even more prominent now given the current situation:

1. What is my investing time horizon? If you’re investing in stocks with capital you need within the next five years, it’s always dangerous to do so. The danger is amplified given the current situation. Stocks are volatile over the short run, sometimes without reason. But over the long run, stock prices reflect business fundamentals and have delivered great returns.
2. Do I have a sound investment framework? An investment framework guides the way you select your investments. I have my own personal criteria to find businesses that can grow at high rates over a long period of time. It has served me well for nearly a decade. But that’s not the only way to invest. Do you have a framework that is based on sound investing logic? If you don’t, it’s always a dangerous time to invest – doubly so, now.
3. Do I have a sound investing plan? An investing plan is like an investing schedule – it guides us on when we put money to work in stocks. Some investors prefer a dollar-cost-averaging strategy, where a certain amount of capital is invested in stocks at regular intervals. That’s fine. Some prefer to be fully-invested at all times. There are also others who prefer to have a cash cushion that they will deploy depending on the magnitude of the market’s decline. These are all fine too. There are two crucial aspects to an investing plan: (1) Does it fit our temperament; and (2) does it make investing sense? If the first aspect fails, it does not matter how good our plan is – we will not stick to it. The second aspect is important for self-explanatory reasons. 
4. Do I have a basic understanding of market history? Knowing what has happened in the past can give us context for what to expect next. It can also prevent us from panicking when stocks decline. Some critical information to know include: (1) How often do stocks decline? (2) How have stocks performed over the long-term through recessions? (3) Are short-term declines common even when stocks climb over the long run? I have shared these things before and they can be found here and here.
5. Do I understand my own investing temperament? How we react to market declines can have a tremendous impact on our returns as investors. The investors of legendary fund manager Peter Lynch made only 7% per year despite him producing an incredible annual return of 29% for 13 years; that’s because Lynch’s investors had poor temperament, selling quickly whenever there was a short-term decline in his fund. If you know you have a poor investing temperament, then set up an investing plan that can save you from yourself.

These questions won’t guarantee that you will come out ahead when the COVID-19 crisis blows over. But I’m sure they’ll greatly increase your chances of success.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.