There’s a 50-50 chance the market falls again Monday. Or it rallies, then continues to fall hard in the months that come. Either way if you’re diligent then you’ve got a reasonable chance of “timing your entry point” and securing good returns into retirement.
Please read our 2020 Stock Market Crash update for the latest details on how this crash is progressing and whether and when to start putting money to work. We will have an update to this article early next week.
For now let’s turn to the emotional side of investing – after all, fear and emotion is driving this market.
The Need for Conviction
I remember watching Patton growing up – the iconic war movie about World War II general (and legend) George S Patton. I always loved his speech about history and what he believed his soldiers’ motivation for following him should be:
“Thirty years from now when you’re sitting by your fireside with your grandson on your knee and he asks, ‘What did you do in the great World War Two?’ You won’t have to cough and say, ‘Well, your granddaddy shoveled **** in Louisiana.’ No sir, you can look him straight in the eye and say ‘Son, your granddaddy rode with the great Third Army and a son-of-a-goddamned-***** named George Patton!’”
I think investors need a bit of a pep talk at this pinnacle moment. Are you going to cower in fear? Or use data, numbers and fact to seize the moment? This is already on track to be a significant correction, and you’re going to require a new arsenal of tools to be able to survive it. And beat it.
You need to summon the conviction to stick to your guns and hold great value businesses for the long haul.
Look to the future and have a strong Vision
Patton had a strong Vision.
He led the command of the United States Seventh Army during Operation Husky, the invasion of Sicily on July 10th, 1943. Patton was granted permission to take the city of Palermo and ordered his troops to cover 100 miles within the span of 72 hours, to accomplish this dangerous mission (an absurd distance that nearly broke them). And he didn’t stop there: he went on to conquer Messina, over the coming month, where they vanquished the ill-equipped German force. He kept that vision in place, and attacked relentlessly and tirelessly.
Patton fundamentally believed – at the core of his being – that he was a resurrected Greek war veteran, whose un-flailing mission was to destroy the enemy, and liberate the forces of Western Europe from the tyranny and yoke of an evil ruler. Does it matter that because of his antics he was side-lined from the war effort and D-Day in 1944? No. His fake-left attack in Sicily was a crucial step in opening up Europe and tricking the German army about where the ultimate landing was going to take place.
In order to benefit from and beat this market downturn you’re going to need to summon that kind of conviction and courage. What’s your vision for the end goal with investing and why do you do it? Do you believe in a better future then today, at some point, where your income-producing assets (stocks which are part-ownership in businesses) are paying you handsome returns and doing better over time?
Warren Buffett’s Recent Interview
Look – it isn’t as if I am alone in this emphasis on the need for conviction. You may very well use a Market Timing Model to figure out when there’s a semi-decent time to buy stock in businesses that are trading at a discount. That moment might arrive this week, or very soon. However the reality is nobody can fully predict the future: at the end of the day once you start buying, you need to know that you’re buying real businesses and not just ‘stocks and shares.’
You might start investing 10%, or 20% of your cash next week. It is entirely possible that what you invest will fall another 10%. Or another 20%, heaven forbid. You need the courage to keep investing.
Warren Buffett – perhaps the most successful investor of all time – was interviewed by CNBC on 24th February and he spent two hours following up on everything from coronavirus, to stocks, to the US election.
The 2-hour interview is a sobering and fundamental reminder of a canonical point regarding long term investing: buy fundamentally sound, cash generative, high quality businesses and they will do well over the long term.
- Analyse the underlying business and ‘get your money’s worth’ in future earning power
- You cannot pick stocks from ‘day to day’ because 90% of their earnings are in the future
- Stocks increase over time through dividends and also retained earnings within the business
- “There is always trouble, as there was when I first bought stocks in 1942”
- It isn’t what the stock is going to do in the next week, month, or year
- Buffett doesn’t have the “faintest idea what [his] businesses will be doing six months from now.” Be comfortable with ambiguity, especially with regard to coronavirus
- The long term is a lot better and easier to predict – 20-30 years from now they will be successful
What is Warren Buffett trying to say?
He’s reminding all of us to stop worrying about the detail of whether the market is a good buy today, or next week. He’s trying to get you to focus on the bigger picture. What are the fundamentally sound companies that you can buy? Are they trading at a discount? How can you invest in those fundamentally sound businesses, today, and hold onto them long enough that you can reap the benefits of compound growth over many years and decades?
The value of a business is the strength of its earnings between now and reckoning day.
In other words businesses are valued on their cash flows and what they can provide for shareholders, in the form of dividend payments, earnings and retained earnings. They are not valued on the stock-ticker price today.
Put Reason in Control
Day trading in this environment could easily rip your face off. If you shorted stocks Friday (expecting more falls) we could easily see a 3% rally. Or a 4% fall. It’s gambling – it’s a coin flip.
The point here is that you need to summon the rational, logical part of your soul and not get sucked into the vacuous emotions and beliefs in the present day, month or year.
It may very well be that 2020 is going to continue to be a rough year for stocks.
It may very well be that the coronavirus is going to be as bad as Swine Flu and perhaps 80,000-300,000 people across the globe will succumb, quite tragically, to this sudden illness.
What you need to summon is the mental fortitude to stick with a rational reason for investing in the first place: you’re willing to accept risk, and in return, be rewarded for accepting that risk by larger long term returns.
What you can do
Take a chapter out of Patton’s and Buffett’s respective books and manage your emotions!
I think that now is the time for those who are not significantly invested in the market to start putting as much cash as possible into their tax free savings accounts and retirement savings accounts.
If you’re long in the tooth and perhaps over-exposed to the market already, you may need to wait for a rally and then start selling speculative, or weak companies with questionable balance sheets. Even if you have to sell them at a loss. Why? Because quality matters and it is really going to matter moving forwards.
Put as much as 85-90% of your wealth into stable and passive investments. And I don’t mean the S&P 500 index. Consider building a Global Dividend Aristocrats portfolio (Canadians here) and buying a balanced portfolio of stocks and shares that pay you income.
When the Market Timing Model turns around and suggests we might be out of the woods, start buying aggressively.
There is a golden opportunity to buy this market, coming up, and rather than trading in-and-out you’re going to want to buy that big dip and hold great companies – FOREVER