In 2004, Warren Buffet is quoted as saying: “only when the tide goes out do you discover who’s been swimming naked.” This quote was a direct reference to the stock market, and it’s timely right now. When people are investing during a pandemic, It can be easy to get caught up in momentum trading or buying a stock simply because everyone else is doing it — or even because it’s been dubbed a “pandemic stock.”
At some point, it becomes more about the company’s ability to grow — or at least sustain itself —through challenging economic conditions. In my November 2018 blog, I referenced a different quote, from James Carville: “It’s the economy stupid”, changing it to “it’s earnings, stupid”. Some stocks may be doing well because the overall market is doing well. But when the economy encounters significant head winds, companies with poor balance sheets will likely underperform. In fact, they may not survive at all.
As we begin to recover from the effects of the pandemic physically, emotionally, and economically: let’s remember the valuable lessons we should have learned. We don’t want to get caught naked on the shore ourselves, do we?
Markets will always go up and down
Most important is to understand that markets go up and down, crisis or no crisis. Even strong bull markets will have corrections. Panic selling, once again, took its toll on investors. The decision to sell is as important as the decision to buy. To be sure, there are industries and companies that will experience long-term and even permanent damage from much of the world being shut down for so long. Other companies were positioned — either by design or circumstance — to benefit financially from the pandemic. The well positioned companies saw their stock price decline only to move higher again. Those who sold too quickly will take much longer to recover.
Stock market volatility is not likely to end any time soon
The market volatility will likely continue, too. Investing during a pandemic is challenging on its own, but the years that follow will come with their own obstacles; we may need to condition ourselves further for large market swings. Rather than staying glued to a 24-hour news channel in hopes of being the only one that will receive pearls of wisdom to give you peace — let’s consider some more simple basics.
Understand what stock you own or intend to buy
In March of this year, many investors purchased Zoom Technologies thinking they were buying Zoom Video Communications. Those that bought the wrong stock at higher levels experienced a personal market correction that was far greater than the drop in the S&P 500 from the high to low in 2020. This is an extreme case (the SEC even had to pause trading of this stock due to the confusion) but it is possible to buy a stock you intended to, yet have no idea what you bought.
Investing during a pandemic: what to consider with healthcare stocks
The slightest hint of any positive development in the fight against COVID-19 is causing panic buying in certain stocks. While it is possible that a company may profit from the development of a successful drug, it is also possible that the profits may represent only a small part of the overall financial health of that company. So, if a company announces a possible treatment — and this has encouraged you to buy one of those stocks — here’s some advice to follow beforehand:
- Be certain you are not over-weighting this stock in your portfolio.
- Follow company developments carefully.
- Be ready to sell when the news (not rumors) is bad, or not what was expected/hoped for.
- Learn how to effectively use a “Stop-Loss” order (if appropriate) and how to adjust it when needed.
- Consider the source of information carefully. (What is commonly known — or is flooding social media — might not be the whole truth or even a part of it.)
All in all, knowledge and common sense make up the best fabric to be clothed in for when the next tide is out.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
No strategy assures success or protects against loss. Investing involves risk including loss of principal. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.