The stock market has been brutal this year. The S&P 500 is down 18% year-to-date and the tech-heavy NASDAQ is already down 29%.
But that’s just the tip of the iceberg. Many stocks have been hammered much worse than the indexes. Big names such as Meta Platforms, Paypal, and Netflix are down 44%, 61% and 72% year-to-date.
Smaller tech companies such as Zoom, Fiverr, and Shopify have fallen by 53%, 72%, and 76% respectively. And these are just to name a few. There are numerous other stocks that are down 70% or more in the last four and a half months.
Investors who enjoyed stellar returns in the past few years have clearly been given a rude awakening this year. In light of this and with investors starting to feel unsure of what to do next, I’ve compiled some common questions I’ve seen online and tried to answer them according to my own investing approach.
Question: What should long-term investors do?
With such steep and sudden declines in stock prices, some investors might be wondering what is the best thing to do now?
As a long-term investor, I am not concerned about what stock prices do over the near term. I prefer to focus on the price that the stock can reach when I’m ready to sell my investments years or decades from now.
For instance, if I bought Stock XYZ at $1000 a share and believe it will be worth $3000 in a decade’s time, then do I really care how it reaches there? Does it have to go up in a straight line? The answer is obviously “No”.
I’ll make the exact same profit in a decade if it zig-zags its way to $3000 a share as if it went up in a straight line.
So instead of worrying too much about the decline in my current net worth or current stock valuations, I’m focusing on the business fundamentals and how much these businesses can be worth in the future.
Question: What aspects of the business should we focus on?
Although stock prices may be going down, my focus is not on the stock price but on business fundamentals.
Is the business growing? Does the management team exude confidence in the long-term growth potential of the business? Are there signs of operating leverage coming into play?
All of these help me build a picture of what is possible for my investments over a long term period.
Question: Should I invest spare cash now?
Steep market declines also provide an opportunity for investors with money on the sidelines to start buying ownership stakes in companies at cheaper valuations.
For example, Shopify co-founder and CEO Tobi Lutke recently announced that he will be ploughing in another US$10 million into shares of his own company. He clearly is taking advantage of the lower business valuations to further increase his stake in the company he founded.
Investors who have cash can use this opportunity to invest in companies that could potentially be worth much more in the future. I’m not saying that stocks will not go down more from here, but at these prices, I think that the long-term outlook is rosy.
Question: Were stocks too expensive before and just reasonably valued after this washout?
There are many stocks that I think were vastly overvalued in the past that will never return to their all-time highs. These are meme stocks, stocks that had too much optimism baked into them, and stocks that may have gotten too overvalued due to hype around them on social media platforms.
These stocks will never return to their former heights. But on the other corner, there are many quality businesses that I believe are in deep value territory.
These are companies that have best-in-class technology and management, and are disrupting industries or just simply executing brilliantly and winning market share. In today’s environment, some of these companies are trading at low valuations compared to what they can potentially achieve in the next decade or so.
Investing in these companies at current valuations will possibly reap double-digit annualised returns for multiple years.
Final words
Although it is unpleasant to see your portfolio so deep in the red, this is part and parcel of investing in the stock market.
Warren Buffett once said that the true investor welcomes volatility. It offers investors the chance to buy stocks at depressed prices and to sell at unreasonably high prices. With some stocks trading at unreasonably low levels today, I think Buffett’s words are ringing truer than ever.
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 have a vested interest in Meta Platforms Inc, Netflix, Paypal, Zoom, Shopify, and Fiverr. Holdings are subject to change at any time