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Waiting for the stock market to reach its bottom, before starting to invest, is a mythical pursuit.
Our fellow StockCardians, since the start of the COVID-19 market crash, everyone is looking for the bottom. Many investors are waiting on the side until the market hits bottom before they invest. Of course, finding the bottom is a logical and intellectually satisfying strategy. However, in practice, finding the precise day or week that the market reaches its bottom and starts its recovery is mostly a mythical pursuit. In this long-form blog post, we'd like to share our approach in dealing with the COVID-19 market crash. Moreover, we will discuss the ways Stock Card can help you to invest during the COVID-19 crash. As always, if you have questions and comments, ping us on Intercom on our website, or send us an email. Our email is firstname.lastname@example.org. Let's get to our guide to investing during COVID-19 ...
Is it time to buy?
A wise man once said, and another wise man recently reminded us that "When the Time Comes To Buy, You Won't Want To." Boy, oh boy, he was right. Nothing seems right when you are pressing the "buy" button amidst a market crash. It doesn't help either that everyone is screaming at you to stay away from the stock market. These days investing in the stock market feels very uncomfortable. Despite that, is it time to buy now?
The short answer is, probably yes, with a few considerations. However, the short answer doesn't help much. Let's get to the long answer and hash things out.
Making investment decisions is a probabilistic decision-making process by nature. You would invest less when the odds of gaining outsized returns are not in your favor, such as the entire 2019. In contrast, you get more aggressive when the odds of success are in your favor. My fellow Stockcardians, the odds of investment success are in your favor simply because the stock market is sprinkled with reasonably priced stocks.
We recognize the boldness of the statement we are making in this post. There is no guarantee that the stock prices will go up from here. And, a few years from now, with the benefit of hindsight, we may see that investing now wasn't the best choice, and we could have waited for a few more months and gotten even better deals. But, we don't have a crystal ball that can show us the future, neither does anyone else. All we can see now is a stock market full of undervalued stocks that we would have invested in them even at 20% to 30% higher prices had COVID-19 hadn't happened. Regardless of whether the prices will continue to fall or not, the odds of success are in your favor if you invest at fair prices.
Why are the odds of investment success higher now?
As you know, on the Stock Card platform, we automatically collect, aggregate, and visualize the mathematical calculations that are commonly used to calculate the fair share price of a company. We use price to sales, price to earnings, price to free cash flow, and price to book value ratios, pull financial analysts' price target, use all that information to calculate companies' fair share prices, and compare them with the current prices. Those calculations show whether a stock is over or undervalued at its current market price.
On Monday, April 13th, there were 6,743 companies on the Stock Card platform. Those are publicly traded companies listed on NYSE, NASDAQ, and OTC markets with a market cap of higher than $300 million. Among them, and as you can see in the below image, shares of only 2% of the listed companies were overvalued. It gets even more impressive when you compare that number to February of 2020 when nearly 6% of the companies with a market cap of higher than $300 million, listed on NYSE, NASDAQ, and OTC markets, were overvalued. When we say the odds of success are in your favor, it's because the chances that you throw a random dart at the stock market board and hit an overvalued stock was nearly three times (6% over 2%) higher back in February of 2020, compared to April 2020. Imagine how much higher the odds of success would be if you take a meticulous look at each company and make an informed decision as to whether or not to invest in it.
Isn't it better to wait and see whether the market falls further?
Similar to every investor out there, we'd love to invest precisely on the day that the market hit bottom. Wait ... wait ... wait ... the bottom has arrived, buy ... buy ... buy ... What a brilliant strategy, except that we don't know where and when the bottom is. If we've learned anything from the preceding 11-year bull market, we know that market forecasts are almost always wrong. We can compare the market's movement with the historical crashes all day and night and try to predict where in the cycle we are, but it wouldn't give us any more concrete answers than an informed guess. While all market crashes recover, eventually, there is no telling where we are in the cycle because every market crash happens in a different economic context.
As an example, during the market crash of 2007-2009, it took the government nearly one year to come up with the $787 billion stimulus package to end the recession. The stock market started a slow descent in October 2007, with a big crash in September 2008, and the stimulus package came through only in February 2009. During the COVID-19 crash, the stock market started its descent late February 2020, and in less than two months, the stimulus cheques and loans have begun to flow through the economy. The context has changed so much, not sure for the better or worst, but a direct comparison between this market crash and any other market crashes in history is only directional correct and lacks context. And, timing the sequence of the market's movement is nearly impossible.
How to invest in the stock market now?
Knowing all that, how should we all invest in this period of heightened uncertainties? COVID-19's most dire impact on the economy is its unique speed. In a matter of one quarter, the demand for some sectors of the economy has fallen to nearly zero. Take airlines as an example. Compared to last year, the number of travelers going through airport TSA has fallen by 97%. Therefore, the source of immediate revenue for airlines has dried down. The situation is no better for restaurant, entertainment, or retail industries. The impact is not as drastic in other industries and sectors. However, a 20% to 30% decline in the revenue of a payment processor and credit company is not unreasonable. It's a no brainer to screen your investment universe for companies with enough cash on their balance sheet to compensate for the lack of revenue without the need to borrow money to fund the day-to-day operations. Focusing on companies with a strong balance sheet would drastically increase the odds of success in the COVID-19 era.
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Rules of the investment game during COVID-19
Before we wrap-up, let talk about the rule of the investment game during COVID-19. The rules are not specific to the COVID-19 market crash. However, they become even more important during a market crash. These are the fundamental rules that at Stock Card we don't cross. It is paramount to our success to draw the lines and not cross them at any cost.
Here are the seven commands of COVID-19 investing to make sure the odds of success stay in your favor:
Without a doubt, COVID-19 has brought dismay and sadness to millions of people globally. People have lost their lives, loved ones, and their jobs. One the one hand, COVID-19 has been a disastrous situation for many people. However, there is another side to the coin. COVID-19 can also be an opportunity, especially for stock market investors.
Warren Buffett once said, he has been lucky to go through a handful of stock market crashes. The COVID-19 market crash can be your lucky opportunity to build your wealth. At Stock Card, we agree that investing at the bottom of the market crash is an excellent idea. However, we don't believe there is a way to predict the bottom. That's why we focus on investing in well-managed companies, with strong balance sheets, at fair stock prices, and we do so as often as we can. The chances are that one of those investments would land at the bottom. That would be a fantastic coincidence. However, most of our decisions will occur during other times but the bottom, and that's okay with us. As long as we take the most advantage of the fair stock prices while adhering and accepting the rules of the game (see the previous section), we feel lucky to be an investor during the COVID-19 market crash. We hope you do so too!
Your Stock Card Team