With the blink of an eye, we’ve returned to pre-COVID levels in the stock market. The Nasdaq just hit the 10,000 level – unbelievable stuff, amidst a time of record unemployment & sluggish demand. One important distinction to recognize before we dive deeper into the key takeaways from this market recovery is that at the start of the crisis, I mentioned that the market turmoil in March was not driven by an economic event, it was driven by a virus. Ultimately, the drop in demand due to precautionary measures imposed by the government caused an economic disaster in the United States and across the world. A much needed lockdown helped eventually flatten the curve.
On Wall Street, nobody seems to care what is happening right now on Main Street. This time has proven how truly disconnected Wall Street really is from the small business around the corner. In the past and now, markets have brushed off short term jolts in the country, taken its time to digest the bad news (i.e. panic selling in March), and then moved on to what the future holds.
As it looks forward, the broader market is pricing in a lot of best case scenarios – no second wave, continued fed support, zero interest rates, and no quarrel with China. One reason I’m not investing more during this market rally is very simple – everyone thinks they’re a genius in a bull market. I’m comfortable with foregoing 100%+ gains right now if it means keeping my cool and staying the course for the long haul. Another reason being – I invested aggressively in quality companies when the DOW hit the 18,000 level back in March.
Here are some investing lessons I’ve learned over the last few months:
Buy the dips in well run companies:
If you bought the dip aggressively in March, you did well. Even if there is a correction in the short term, buying well established companies that consistently pay a dividend is a smart play for the long term. The recovery back to pre-COVID levels in some of these companies has been phenomenal. Below is a 1 month chart on Robinhood:
Do research ahead of time when there is no volatility:
Right now and almost always, I’m on the hunt for companies that are attractive buys for the long term. Some things I look for are the company’s abilities to adapt to changing consumer behavior. For example, one company I really like is Phillip Morris. Cigarette smokers are on a continuous decline since the last decade. Therefore, tobacco company Phillip Morris has found innovative solutions to see how it can deliver a more smoke free future by continuing to market their product called IQOS. Not to mention, it pays a generous 6% dividend.
Have a list of companies written down to buy during the next market plunge:
When opportunities come your way, like they did in March, you should not fear the worst. Avoid following the herd and instead, invest according to your risk appetite. The stock market does not go up forever and at some point, this unbelievable rally will come to an end, either in small steps downward or in the form of another massive selloff.
Investors will get burned on speculative trades:
In the last couple of days, I’ve been stumbling upon articles in the Wall Street Journal that go through individual investors’ examples of skyrocketing gains on companies that declared bankruptcy and then saw an upward spike (i.e. Hertz). When I see such scenarios in the market and read about a spike in investor interest, this is a red flag that the market has gone ahead of itself. Sooner or later, it will come down and you have to be prepared to take the leap when fear comes back with a vengeance.
Keep a level head:
In the midst of optimism in the market with major economies reopening, you have to leave room for the unexpected. No one expected COVID-19 to strike and this time is no different. As the world opens up again, lets not forget the risks of retaliation from China that can put markets in frenzy once again. If that means foregoing 50-60% gains in the market, make it happen. Personally, I’ve lost interest in the market recently because I see a lot of foolish behavior from inexperienced investors who are day trading for quick gains. Greed has taken over with the market recovery, and that is a HUGE red flag. I’m in 20% cash currently relative to my net worth and I plan to keep it that way, as I wait for a more attractive buying opportunity.
This blog and the information contained herein is not a platform for guaranteed success on investments. The companies I mention in my posts are NOT recommendations for investments. The views expressed are my own and I strongly suggest to do your own research prior to making any decisions. Because the information on this blog is based on my personal opinion, research, and experience, it should not be considered professional financial advice. The blog is a discussion forum and not a website for access to financial data. I have no access to material non-public information nor any discrete information on publicly traded companies.