When there is the wind, you can either build a wall to protect yourself or erect a windmill to harvest it. The stock market is volatile, and most good investors learn how to "build a wall" to protect themselves from volatility. However, great investors learn to harvest it.
According to Nassim Nicholas Taleb, the author of Antifragile, whatever that doesn't like volatility, is fragile. A teacup hates sudden movement because a sudden change means the demise of the teacup. Similarly, most stock market investors hate market volatility. There is an entire financial services industry built to create teacups, stable, low-volatility portfolios. Diversification is a classic example of "teacupification." Financial advisors and experts take clients' money and put in a diversified portfolio. They also ask the clients to be patient and give the portfolio enough time to overcome the volatility. Less risk, less reward, and longer time horizons are the typical ways investors deal with volatility. For my entire life as an investor, I have been in this camp.
Avoiding risky stocks, such as recent IPOs, and giving my portfolio time to let volatility pass have made me an excellent investor. The evidence is my "Roll With Our CEO" portfolio. On Average, it has outperformed the S&P 500, the leading benchmark for gauging performance. I have overperformed the market, which is excellent. However, my overperformance in the market is not massive. In most years, I've overperformed the market by a few percentage points. In a few good years, I crushed the market by doubling the market return. It's great! I can continue doing so, and time can heal most money losses. You can do it too. Pick well managed, well-funded winners, let them grow over the years, and grow your investment with them. A few percentage overperformances every year, over a few decades, become good enough to retire safely. But, what if there was another way. What if instead of controlling volatility and protecting your portfolio from volatility, we could erect a windmill and harvest it?
Introducing the "Windmill" portfolio
The windmill portfolio is a portfolio designed to harvest market volatility. It is built on the foundation that risk is reasonable and must be harvested not mitigated. Four pillars guide me in the creation and management of this portfolio:
With those criteria in mind, and as always, I would document and share my assessment of each stock added to the Windmill portfolio with our VIP subscribers. Make sure to follow the portfolio by clicking on the bell icon on the top-right corner of the portfolio page. I will also add the decision to my "Roll With Our CEO" portfolio since that portfolio includes every decision I have made since November of 2014. Roll With Our CEO portfolio is my overall report card as an investor if you'd like to call it.
Our very own Head of Data Science, Karen Sheng, is introducing the Phoenix portfolio on our Portfolio Store. Being a technical trader, Karen has a unique and different strategy for investing. Read along and follow her Phoenix picks by clicking on the bell icon on the top-right corner of her portfolio page.
The COVID-19 pandemic has disrupted our lives in an unprecedented manner - from where and how we communicate and work, to how we seek medical attention is drastically different compared to only a few months ago. In the world of investing, while some sectors such as travel and hospitality have become distressed, the demand for other products or services has grown drastically. The general public adapts to the new "normalcy," and so needs our investment approach. We started to put together and invest in a diversified portfolio in this context. Our CEO has already launched the COVID-19 portfolio that focuses on a group of stocks with strong fundamentals that are more resilient to the market correction caused by the outbreak of COVID-19. Her COVID-19 portfolio is mostly focused on the so-called "buy the dip" approach. The new Phoenix portfolio is more of a defensive play. Being a technical trader, I’m inclined to purchase stocks or get into bullish options trades when a stock has either recovered or maintained bullish momentum.
Use this portfolio to get a balanced view of possible approaches to benefiting from the COVID -19 opportunity. I have put my real-money in the stocks in the Phoenix portfolio to back my decisions. There are more stocks on my watchlist, and I am continually monitoring them, waiting for a pullback to identify opportunities for entries. Follow the Phoenix portfolio by clicking on the bell icon on the top-right corner of the portfolio page. Stock Card sends you an email automatically when I add a new stock to my collection of Phoenix stocks.
By the way, this is Karen, and I own all of the stocks included and will be added to the Phoenix portfolio. Also, Stock Card has a Disclousre policy.
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.
We built Stock Card to make your stock market research simpler, faster, and more fun.
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
Our very own Shama Patwardhan, Head of LiveOps, has published a new portfolio to the Portfolio Store. This portfolio is particularly interesting because of its focus on companies that are shaping the future by making the world smarter. Investing in future-defining companies is always a good strategy. However, it is even more important to go the extra mile and bring our attention to the companies that are shaping the world's future. During the COVID-19 market crash, most investors get bogged down by the day-to-day market fluctuations. However, savvy investors don't take their eyes off of the prize, and that's precisely what this new portfolio is set out to achieve. Scroll down to read about the Smart World portfolio.
Invest your money now, to secure your future!
Make your money work for you!
Every now and then, we come across such advice through articles, books, and news. So why not secure our future, by investing in it? Our future will be highly impacted by advancements in research and technology. Rapidly growing fields such as artificial intelligence, machine learning, big data analytics, and Internet-of-Things would be the backbone of our future. Overwhelmed by the big complex words?! Don't be! It simply means that our future will be dependent on technology that develops fast, high-quality products, makes our devices understand us, and helps us connect with the outside world using the internet. These products have been and will shape our future, giving birth to a Smart World. You have already heard of smart homes, smart cars, and smart cities! So how can we participate in this exciting future? We find strong growing companies that are working towards making the world smarter and invest in them over the long term! As the company succeeds, our portfolio succeeds and rewards us with a strong positive return.
Every investor looks for a chance to buy shares when the stock price is undervalued. And that's what's happening now. With the Coronavirus outbreak, the stock market has been consistently falling. Instead of panicking, we look at it as an opportunity to buy great companies at a discounted price!