The Confident Investor

The stock markets are down more than most investors can ever remember due to economic pullback as Covid-19 starts to spread in the United States and the rest of the world.

I am not going to offer public commentary on the actions or inactions of our political leaders or the various health organizations that are leading this fight. I am confident that everyone is doing what they think is wise in this time of uncertainty and doubt.

Those last words in my previous sentence are the most compelling to investors: uncertainty and doubt. 

Uncertainty and doubt are things that investors fear the most. It drives stock prices down, and that is what we are experiencing now.

So what is my advice for the individual investor to do?

GET OUT!

I frequently tell people that they don’t need to dance with the date they brought to the party. In other words, you invested in a company that you liked, but now it has dropped 5%, 10%, maybe 25%. Many advisers will tell you to hang on, and the stock will likely rebound. I am not going to tell you that. They are telling you to dance with the date that you brought to the party. I am telling you to find a better-looking date.

Right now, the best looking date around is almost surely CASH. Maybe that date should be GOLD (I don’t love investing in commodities, so I will stick with CASH). As I write this, there aren’t that many good looking dates on the dance floor right now. In my opinion, CASH is the best looking dance partner.

Eventually, the party (i.e., the market) will be more fun. There will be other good-looking dance partners (i.e., rising stocks). That will be maybe next week, or it might be next month or in two months. I don’t know and I am not going to predict when the good-looking dance partners will be available, but I know that they will be there eventually. Until then, I will dance with CASH.

When the market gets going again, the stock or stocks that you rode down to this low level may be going up, but it is more likely that other stocks will be going up faster. Betting that the stock that you rode down is a gamble. It is more likely that another company is going to be doing better in the recovery. That is the better-looking dance partner. Right now, we don’t know which dance partner (stock) that is, but betting on the one that got you here is a risky move. I don’t like risk.

So sell everything now. Go to cash. Then use that cash when the recovery starts to ride back to even as fast as you can.

BUT I INVEST IN INDEX FUNDS OR INDEX ETFs

Great! I have a portion of my portfolio in Index Funds as well. But the advice still holds. Do you really think that the market is done dropping? If you sell now, you can buy more as the market recovers.

Let me explain.

As I write this, QQQ (Invesco QQQ is an exchange-traded fund based on the Nasdaq-100 Index) is at $177, which is down from a high about three weeks ago of $237. Yes, this dance partner dropped about 25%. If you sold today, you would have $177 for every share you bought. Let’s assume you had 100 shares, so that is $17,700 (and you had $23,700 just a few weeks ago – OUCH!).

It is quite likely the market is going to go lower before it gets better, so let’s assume it drops another 10% slowly over the next month and then starts to recover. Let’s assume that you are confident that it is going up when it goes up 5% from that low (which is 5% lower than today). This means that QQQ will be going for $168. You can use your $17,700 to buy 105 shares. Now let’s assume that eventually, QQQ goes back to its high of $237. That means you will have $24,885 or $1,185 in profit, just because you went to cash and then bought low.

Many great investors say that you will make most of your money by managing your money during a bear market.

BUT THAT IS TIMING THE MARKET AND EVERYONE SAYS NOT TO TIME THE MARKET

You are correct. Many sites and investment companies will tell you not to time the market. However, what do the ultra-rich do? They time the market. Warren Buffett is regarded as one of the best investors of all time. One of his sayings is, “Be greedy when others are fearful.” That is all that I am suggesting. It would be best if you went to cash so that you can invest at a lower level than today. Then it would be best if you bought more stock when it is at a lower price.

WHAT IF I AM WRONG?

Simple, repurchase your stock as it goes up. You can be pretty sure it is still going down for a couple more days. Do you really think the bad news is all done? Even if it drops 1% and then goes back up 1% (net zero), you haven’t lost any money by buying next week at the same price as today. Nearly every stock site now has 0% commission, so your trading cost is $0.

WHAT IF I AM RIGHT?

You just made money in the bear market. I don’t charge anything for my advice. Come back to my site if you want more help. Follow me on Twitter or StockTwits. If you want to understand my opinion, read my book, The Confident Investor.

Also, if I am right, you will not be watching the falling stock market with dread. You will simply be waiting for the eventually flattening and then the rise when you can get back into the market.