This Too Shall Pass
This is a good article to serve as a reminder. At the risk of sounding old, with 23 years of experience in the financial industry, and it may seem corny, but I must admit “I’ve seen it all before”. 1998 Asian Financial Crisis, 2001 Sep 11, SARS in 2003, 2008 global financial crisis. The chart does look scary. It is the fastest 18% fall in history because we are in the age of automation and robots trading. ETFs are also causing this sell down as it indiscriminately liquidates stocks when investors sell. Below is the S&P500 ETF, SPY. 18% drop from 18 Feb to now, in 15 trading days.
If you are very worried, stretch out your chart on a weekly basis, and over 5 years. It now looks like familiar territory? It is now resting on the 150 weeks moving average. On 24 Dec 18, it rested on the same moving average and shot up by over 25%. On 8 Feb 2016, it tested again and recovered 53%. Now does it look familiar? We have seen this happen twice previously in the space of five years. The virus will eventually die out and the travels, eating, buying, consumption will come back. Until the next disaster strikes years later.
Still worried, do the monthly chart and stretch it back to 1994. The markets have fallen a lot more in the past and recovered back.
If you buy good companies, they will be around and their earnings go keep going up. Look at Microsoft and Apple. In Dec 2007, Apple was USD29. Fell by 40% to 18 and shot up to over USD280 today. The disaster of 2008 went past and we have forgotten about it.
Microsoft was around USD50 in 2000, at the height of the tech bubble, fell to 20 and recovered to 175 recently. Good companies, with strong cashflow, products and services that will never be outmoded, will survive and grow.
What I would do now
In January, 2020, we saw that a correction is imminent. Most of you didn’t exceed 40% equities in your portfolio. This sell down should not affect you a lot.
Right now, I will wait for the dust to settle, average in on the way up, not on the way down. Why?
1. Markets take 5 times longer to rise than to fall. You have plenty of time to buy on the way up.
2. If you buy on the way down you may run out of money.
Look for unit trusts, funds, that invest in good companies. Buy some of these good companies yourself.
1. Look for companies with wide moat, high barriers to entry. They must have strong brands, the ability to increase prices without losing customers, high switching costs, e.g. Facebook, Instagram.
2. Increasing revenues,, net profit, free cashflows over 3 to 5 years.
3. Low debt to asset, e.g. less than 40%?
4. Companies that sell products that you readily consume, e.g. Yum (KFC), Johnson & Johnson, Microsoft, , Facebook, Alphabet, Amazon, Apple, Xiaomi, Tencent, Baba. You will know when their products / services have turned bad when you stop using them.
Look at good entry points, look at the monthly charts whether the MACD is positive or negative. Only buy when the trend is in your direction.
Below is a good article to remind ourselves.
I didn't have the experience during the correction in 2008 and was only a student. I was still wondering why gold doubled that time till 2011. Last year I saw the chart and managed to buy S-REITs & QQQ. Agree that good businesses with wide moats will last long. Good article which serves as a reminder can be made immutable as NFT, for your consideration.
ReplyDelete