Think Like a Man of Action, Act Like a Man of Thought.

financial markets deep thought

As financial markets continue in their highly erratic trajectory, amid Covid-19, they leave opportunity (as well as shock and awe) in their wake.

This is a time when it is especially important to avoid emotional reactions and focus on intelligent decision-making. Revisiting some notes made a decade ago during more quiet times – specifically, the sub-prime mortgage crisis – here are five suggestions that might help to both calm nerves and enhance decision-making capabilities.

1. Don’t make more predictions than your data can support.

As Warren Buffett once noted, “You should invest in a business that even a fool can run, because someday a fool will.” Now that a virus has taken over management at so many companies, we’ll have to see which fools have been the wisest in preparing for tough times. What does the company do and how does it make money? Beyond this, short of being a member of the company’s management team, there’s not much else you can know for sure. Restaurants and hotels will likely take longer to return to normal than makers of household products. Dividends and yield will suffer.

2. Focus on the not-too-distant future; near-term forecasts are more certain than 10-year projections.

The future has always been hard to predict and this fact is unlikely to change just because investors wish it would. Assuming China doesn’t see a second wave of infections (an “if” worth watching for) it appears the worst is now in their rearview. After a few months, life begins to look familiar in Chinese cities. Let’s hope it stays that way and we follow a similar path, needing 24-weeks instead of 24-months to begin our recovery. But there seems little sense to talk about what the economy might look like at this time next year, or even year-end. Always be suspicious of undue emphasis on the long-term, especially when the short-term isn’t looking so good.

3. Be wary of precision; it is better to be vaguely right than precisely wrong.

Too much detail gives a false sense of security. It’s just human nature to think someone predicting that earnings for the S&P in 2020 will be $174.44 must know more than someone who simply suggests that earnings will be more than the estimated $163 achieved in 2019. Yet all we can really expect now is that the S&P will struggle and is unlikely to achieve any growing earnings growth over 2019. Don’t trust anyone making an earnings prediction for 2020 or 2021. The financial markets will likely do worse than what we enjoyed in 2019 and you should plan accordingly.

4. Income isn’t always income.

A stock or stock fund paying a big dividend is not a safe place to hunker down. Even a 6% dividend doesn’t mean much if the value of the underlying asset has dropped over 25% since January (the average for stocks in the S&P 500, so far). Four years of dividends have evaporated and many high yield investments will be forced to cut their payouts, possibly even before the virus fades, adding even further downward pressure to already stressed investments. The current yield of the S&P 500 is now over 4% – which won’t mean much if we’re only halfway to the bottom for equity prices.

5. Avoid greed.

I fully believe that our country will get through this – just as we do with hurricanes and financial shenanigans. But there is currently no end in view to the Covid-19 crisis and bottom-feeding at this point is more likely to make you poorer, not richer. Frankly, if you depend on your savings to live on, consider some selective cash-raising opportunities. Sub-prime saw a 50% decline from top to bottom – we’ve only seen half that amount, so far. At this point panic is bad, but being a Pollyanna might be worse. Make sure your umbrella is big enough to keep you dry until the storm passes.

More Invest-Notes

-edfu2.com-

This entry was posted in Investment and tagged , . Bookmark the permalink.

6 Responses to Think Like a Man of Action, Act Like a Man of Thought.

  1. Cowboy Matt says:

    Chris,
    Nice level setting. Let cooler heads prevail. Thanks!

  2. Mark Howson says:

    Chris,

    A note of thought on a topic of high interest from you as usual. As I think of our many conversations, thinking back to the Flying Saucer, these thoughts were frequently within those discussions. Your five points apply at all times in investing rather in an upswing or a down swing. If you are out casting your fly rod on the crystal clear waters of the white river and your investment strategy is burdening your thoughts preventing the joy of the moment, the feel of cool flow of the water against you waders, the eagles in flight over head, and the excitement of catching a big brown trout, maybe you should rethink your strategy. Fishing was good today!

  3. Karcher’s college roommate says:

    When the going gets weird, the weird turn pro.

Leave a Reply

Your email address will not be published. Required fields are marked *

*