I was recently interviewed by Timothy Ho, co-founder of the personal and business finance online knowledge portal Dollars and Sense. The interview is part of Dollars and Sense’s #TheNewNormal interview series. With permission, I’ve reproduced my conversation with Timothy here. We covered a number of topics, such as the recent divergence seen in stock prices and economic growth, and whether I’m invested in other asset classes beyond stocks. You can head here for the original interview.
Interview
Timothy Ho (Timothy): As a writer yourself, you wrote on your blog about how this current disconnect between Main Street and Wall Street isn’t the first time that stocks did fine when the economy fell apart. What makes this recession experienced by many countries different from past recessions such as the GFC and the Asian Financial Crisis?
Ser Jing: You mentioned the GFC, and I have looked at how stocks recovered during the crisis. Interestingly, it follows a similar pattern to what I wrote about in the blog post that you referenced. Although the S&P 500 reached a low in early-March 2009 during the GFC, many individual stocks bottomed months before that, in November 2008. And it turned out that the US’s GDP and unemployment rate continued to deteriorate for months after these individual stocks reached their crisis-lows. I wrote about this in a blog post linked here. So, I think a takeaway here is that stocks tend to – though not always – look ahead into the future. While things may look bleak today, stocks may already be racing ahead in anticipation of a better tomorrow.
This COVID-19-driven recession has caused pain to many economies around the world. In response, central banks in these economies have at times intervened in unprecedented ways. Some market participants may point to these interventions as the reason why stocks have risen so much from their pandemic lows. But I want to point out something interesting. In my blog post that you referenced, I wrote about how US stocks did during the Panic of 1907. This was a period of immense economic pain for the USA and was one of the key reasons why the US government decided to set up the Federal Reserve (the US’s central bank) in 1913. During the Panic of 1907, the US economy was still in shambles even in 1908, but the US stock market had bottomed in November 1907 and then started climbing rapidly in December 1907 and throughout 1908. And here’s the interesting thing: The US central bank was not even established back then. So perhaps there’s more to the recovery in stocks from the pandemic lows that we’re seeing today than just the actions of the central banks.
You also asked what makes the COVID-19-driven recession different from past recessions such as the GFC and Asian Financial Crisis. One key difference is that most past recessions were the result of excesses in the economy (both the GFC and Asian Financial Crisis were caused by excessive borrowing – on the part of households and financial institutions in the case of the GFC, and on the part of countries in the case of the Asian Financial Crisis). The COVID-19-driven recession, on the other hand, was caused by disruption to our daily work and ceasing of many economic activities to halt the virus’s spread. It was not caused by excesses in the system. This is a point that Howard Marks, an investor I deeply respect, has made. So, I think a lot of the playbooks that investors have developed based on the lessons from past recessions may not be very applicable in today’s context.
Timothy: It will be easy for us to simply say that investors are starting to realise the importance of investing (or investing more) even during a recession. But is there an element of FOMO (fear of missing out) that is creeping into many retail investors? For example, we see meme stocks, NFTs and cryptocurrencies being incredibly volatile, not to mention, speculation of many pump-and-dump tactics at work. Are these factors contributing to this surprising bull run?
Ser Jing: It’s hard to tell what are the psychological factors that contribute to the current bull run in stocks. I don’t have a good answer. But I do think it’s clear that there are speculative actions being seen, as you rightly mentioned, in some corners of the financial markets. If these speculative actions lead to excessive, widespread optimism about stocks soon, then another crash may be around the corner.
Timothy: While it’s good to see people getting interested in investing and trading in the financial markets, I realised that many new investors I met these days are more open to investing or trading, even when they recognise that they don’t have the knowledge they need. It’s like the desire to get started on their investment journey outweighs the need to learn first. In your opinion, is this good or bad?
Ser Jing: Great question! My answer is “it depends.” If the new investor is young, with decades ahead to make full use of his/her human capital, then getting started on an investment or trading journey even without the requisite knowledge is not a bad thing. The best teacher for such lessons is the mistakes we make ourselves. By starting early, the new investor gets to make the important mistakes, when her capital for investing is small and when she has plenty of time to recover from her mistakes by making more money in the future from entrepreneurship or employment. On the other hand, if the new investor is approaching retirement, then starting to invest or trade without the requisite knowledge is a bad idea.
Timothy: What are some things about the stock market that have surprised you over the past 18 months?
Ser Jing: I am generally not surprised by what happens in the financial markets, not because I can predict the future (I absolutely cannot – I have no crystal ball), but because I am aware that surprising things happen all the time in the financial markets. But I am still in awe at the magnitude of the rebound in stock prices from the pandemic lows.
Timothy: With decentralised finance (DeFi) taking center stage (pun intended), do you personally expect to see a financial world in the future where prime assets to hold go beyond just stocks and properties, and include other asset classes like NFTs and cryptocurrencies?
Ser Jing: I am still very much a novice when it comes to NFTs, cryptos, and blockchain technology. I am still learning, and it’s a fascinating area. I don’t know what the chances are that NFTs and cryptos will become prime assets in the future. But I’ve seen some forward-looking venture capitalists compare the state of NFTs, cryptos, and blockchain tech today to what the internet was like 20 years ago. Back then, the internet seemed mostly like an object of curiosity but look at what it is today. For now, I am watching developments in the blockchain space as a highly curious and interested novice.
Timothy: Beyond just individual companies, do you look at other traditional asset classes like indices and bonds in your investment portfolio?
Ser Jing: I don’t have my own personal investment portfolio. I set up Compounder Fund with Jeremy to invest in a way that we would for our own capital. The short answer to your question is that I don’t invest in other traditional asset classes for the fund.
Now for the long answer. First, when it comes to indices, I think it’s a great starting place for an investor who’s new to the financial markets. But for someone with expertise (and a very important part of the expertise involves having the right temperament), investing in individual stocks can generate much higher returns than investing in indices. There’s no guarantee that Jeremy and I have the expertise. But at the very least we have discipline – we’ve written about our investment process and methods in detail, and we intend to stick to what we’ve discussed. Second, when it comes to bonds, I don’t think I know bonds well enough to be able to form an investment opinion on them. I only want to invest in things that I understand well – and for now, it’s only stocks.
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. Of all the companies mentioned, I currently have no vested interest in any of them. Holdings are subject to change at any time.