I’m sure many of us, including myself, are looking through dozens of articles and Facebook posts, for any clue that we have hit the bottom and can start buying stocks or bonds. This is called market timing.
Are you as good a market timer as Warren Buffett? He bought $45mil of Delta airlines stock at $46.40 in late Feb 2020. It is now trading at $21.30. A lost of over 50% or over $20 million in 2-3 weeks.
How about Ray Dalio, the world’s most successful hedge fund manager? In Jan 2020, he proclaimed that cash is trash, and that he didn’t see a recession in 2020. His funds are now reporting losses of 9%-21%.
Now my point is not to disparage these two great men, and bring them down. They are far more successful investors than me. They will come back stronger than ever from this crisis.
These two legendary investors have attended prestigious schools and received the best education that the world has to offer. They have been investing since their teenage years. Now as leaders in their fields, they have access to information much better and faster than the rest of us. They have full teams of people combing the markets daily, using the latest technology that cost thousands of dollars a month. Lunches with insiders are common and are only to glad to give tips that only they know and what’s happening on the ground.
But yet Warren Buffett and Ray Dalio did not see the March crash coming and were taken by surprise.
Do we have any of their advantages? Do we even have a fraction of the tools and powers at their disposal? My point is that even the most knowledgeable and successful investors in history cannot time the market. You and I have no chance.
Can anyone really be 100% prepared for a crash?
What are the chances that you and I had sold 100% all of our holdings and were holding all cash before the crash hit us?
Zero. No one is dumb enough to put all their money into cash in a rising market. Most sensible investors would just increase their cash allocation, moving it up to 30% or even 50%. But they know they must keep some holdings in equities or bonds. Cash consistently loses value as itself.
Timing is dangerous. Let’s say we did sell out earlier, maybe Nov 2019. Most people who had sold would be kicking themselves when the markets soared in Jan 2020. We then throw in the towel, and buy in Feb 2020 more expensive than we sold, just in time for the crash. This is the far more likely scenario when we try to time the market.
Can we predict a recovery?
So, virtually no one saw the crash coming. How about the reverse, can we see the recovery coming?
The speed and severity of this crash is unprecedented. The 2008 crash took about 1 year to drop around 40%. This crash took about a month to drop 30%. We have not seen anything like it before in history, there are no real historical markers to study how fast a recovery can come.
Should you wait till your Facebook feed and friends starts shouting buy buy buy, before you go in? That doesn’t seem very likely to happen. Half of them would be saying buy, half are saying its a dead-cat bounce.
Can we listen to the gurus who promise massive gains and have timing systems? If only they posted their trades before they sold and made the gains already. Wouldn’t it be great if they posted their actual portfolios and trades?
The truth is that no one can tell the bottom. People can stare at the charts as much as they like and say what pattern or handle is forming. But no chart can say if there is another sudden outbreak or cluster of virus cases, or the effect of the stimulus packages. These are all dynamic events, which cannot be captured in a chart showing what happened yesterday.
I can say with confidence that things will eventually recover and humanity survives. It is a question of when.
The Greatest power in Investing
The most important power in investing is not about knowing how to interpret annual reports, and what is EPS, DPS, etc. It is not about knowing how to read charts and see what candlesticks.
The most important power is holding power. You need to hold with conviction, and refuse the most ridiculous and low ball offers you get.
If a stranger walks up to you and offers to buy your house at 20% -50% less than what it was yesterday, what would you say to that?
If you were in a panicked mood, desperately needed the cash, and fearful of getting an even worse offer, you would be forced to accept.
If you have reserves, a steady job, and the ability to wait, you can tell that person to fuck right off.
Be the second person. Hold on and know what is your price.
What have I been actually doing?
I don’t really want to give you advice on how to proceed. I don’t know how long things will take to recover. It is likely that in the short-term, I will lose money on my purchases.
I’m just going to say what I have been doing.
I bought 4 shares of Amazon at $1,940 (already down 4.85%).
I bought 37 shares of FaceBook at $150
I will keep buying small on down days.
I have holding power (but not unlimited) and can take another 20% drop.
That is all.