When your entire portfolio is showing red and the market’s in chaos, the best thing an investor can do is remember one key piece of advice: Don’t Panic!
Aug. 1, 2020
Way back in March, we went through the worst single-day stock market performance since the 2008 financial crisis. The S&P 500 (NYSEARCA: VOO) fell close to 8%, alongside the Dow and Nasdaq; Apple (NASDAQ: AAPL), Boeing (NYSE: BA), and Goldman Sachs (NYSE: GS), stalwarts of the market, all saw their stocks tumble. But amongst all the doom and gloom, the market rose again and has been scorching through records.
However, with coronavirus cases on the rise once more and global debt hitting unprecedented levels, there could well be another crash on the horizon, followed by a recession.
If so, it’s important to remember the sound advice of one of my favorite authors, Douglas Adams:
Full disclosure, Adams was offering this advice to his ‘Hitchhiker’s’ protagonist Arthur Dent as he floated through the vacuum of space, doomed to die, but it is still applicable here. In fact, The Oracle of Omaha himself and legendary Berkshire Hathaway (NYSE: BRK.B) CEO Warren Buffett gave the same sage advice at last week’s annual Berkshire shareholder meeting.
Fun fact: ‘The Hitchhiker’s Guide To The Galaxy’ turned 42 this year.
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Will the coronavirus panic end?
There may be nobody on earth that could have an answer to that question. If history has taught us anything, the market will take a brief but expensive hit that will pass in time, as all things do. The SARS outbreak did not come 11 years into a bull market though. After the longest bull run in history, it was only a matter of time before a downturn would happen, for such is the nature of the stock market.
To put this into context, there have been an estimated 47 recessions in the U.S., dating back to the Articles of Confederation in 1777, which averages at a recession every 5.17 years. It is as normal an occurrence as Facebook (NASDAQ: FB) doing something shady. And much like our reactions to Zuckerberg and Co’s shenanigans, we ignore it and move on. Some recessions are obviously more serious than others, and none more so than the Great Recession of 2008, which seems to have frightened people so badly that any signs of stock market volatility such as we are experiencing now, results in an emotion-driven sell-off.
March’s collapse was also the result of an ill-timed price war in the energy sector, sparked by failed OPEC (Organization of the Petroleum Exporting Countries) talks between Russia and Saudi Arabia due to the price of crude tumbling in its worst day since 1991. This drop particularly stung debt-heavy energy companies such as JPMorgan (NYSE: JPM) and Bank of America (NYSE: BAC), who will be forced to dip into reserves to help with their loans to Big Energy.
All of these factors were wrapped up in one horrid little bundle, resulting in an especially horrid day for the market, and if it happens again, it won’t be the end of the world.
Not all stocks suffered
I understand that when it comes to matters of finance, it is nearly impossible not to panic. When I found out that ‘Baby Yoda’ merchandise production from Hasbro (NASDAQ: HAS) would be delayed due to manufacturing issues in China, I nearly dumped every share I had, sold the house, and moved to Mexico.
But I didn’t panic (although in this particular case I believe I could be forgiven for doing so).
Moving swiftly on, the market adapted, and at-home stocks bloomed. The potential isolation of those infected with coronavirus resulted in surprising gains for some stocks. Remote video conferencing software Zoom (NASDAQ: ZM), Teladoc (NYSE: TDOC), Slack Technologies (NYSE: WORK), Netflix (NASDAQ: NFLX) and more soared.
There could be an upside
Here at MyWallSt, we have a simple philosophy: ‘Buy and hold ’til you’re grey and old’.
This investment thesis comes from the Peter Lynch school of thought, and as you can see from the performance of our stocks versus the S&P 500 below, that philosophy is paying off nicely, even amidst the coronavirus panic.
The reason we buy and hold is that during times of turmoil such as this, when stocks are plummeting left and right, we know that in the long-run, the stock market has historically always risen eventually. This is often due to the nature of compounding, as wealth grows in value over time. It was Albert Einstein who famously said:
“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Who are we to argue?
The historical stock market average return is around 10%. It is rarely actually in that bracket, but overall, the market always rises in the long run. Between 2010 and 2019, the S&P rose 490%, the tech sector grew by nearly 500%, while on two separate occasions, the market experienced nine straight quarters of gains.
If you are a long term investor, the only question you should be asking yourself when a recession or correction hits is whether to buy more of your favorite stock at a discount.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.