The stock markets are becoming more volatile again. Winter is coming in the northern hemisphere, and with cold nights it brings back the grim memories of the last spring. I do not know if there will be another crash like in February/March. It would surprise me if the infection numbers alone or even a second lockdown caused another crash. I consider it more likely that another black swan event will trigger the next crash. On the other hand, the markets have been driven by a particular fear and greed since February.
The rising numbers of COVID-19 patients are not surprising
The high increase in the number of newly infected persons should not be surprising and was actually foreseeable. I did not expect this speed myself, but in the end, the current scenario is precisely what many scientists have predicted. The difficulty now, of course, is for politicians to react proportionately to developments. What is clear is that any restriction of the economy will have massive effects. We have already seen this in February and March.
It will also be clear that governments must once again raise massive sums of money to repair the economic and social collateral damage of the virus and countermeasures.
Will there be a new COVID-19 crash?
No one can predict the development of the stock markets in the short and medium-term. Such an attempt would also be unprofessional and does not correspond to the way I want to handle the TEV Blog. So don’t expect me to make any predictions about how the market will develop in the next few months.
Against this background, I can nevertheless say what corresponds to my feeling. And let me be clear here, my guts do mostly not express or predict the reality. However, this is my blog, and I am free to express my opinion the way I like to 🙂
I believe that the markets have been driven by extreme fear and greed since March. On the one hand, there was the fear of missing profits and, on the other hand, the greed to participate in the profits. I already summarized how much fear and greed are connected in a blog post about the CNN Fear and Greed Index.
In a way, I was part of this greed because week after week, I put shares of the fallen companies into my portfolio. Companies such as Leggett & Platt, TeamViewer, or Realty Income are still in the double-digit profit zone. If this greed persists, it is clear that greedy investors will rebuy any price decline. Therefore, I believe that the growing COVID-19 numbers and even a second lockdown alone will not cause a second crash.
Things that worry me
Nevertheless, there are some developments that I am concerned about, which in turn may trigger black swans events. The pandemic and crisis lead to a global standstill of progress and development.
Apart from individual sectors that benefit (my Logitech shares have exploded), most of the economy is trapped in a month-long limbo without knowing what to do next, which has implications for the individual. Students are worried about their future. Many companies are not currently hiring graduates and prefer to wait and see. This waiting is accompanied by the fact that companies no longer invest in future growth.
Government offsets these adverse effects with aid packages, bailouts, and checks. I appreciate those measures since they prevent a lot of suffering for many people. The problem is, however, that those measures only maintain the current cycle. But they cannot ensure that new value is created. But for the progress of our world, building such value is crucial.
In the long run, this search for value within the framework of competition makes increasing prosperity possible. In the end, stagnation means that the present value will wear out. Therefore, this aspect worries me, and it may be that this has not yet been priced into the stock markets, and many investors assume that prices will rise again shortly towards further records. They forget that bubbles can also occur in sideways moving markets. But perhaps I am too pessimistic here. Who knows. The good thing is that none of this changes my investment approach.
Do not let fear and greed guide you
With all the uncertainties in this market phase (Brexit, elections in the USA, COVID-19), never let your emotions guide you. Greed and fear are the worst advisors of all. Do not sell your shares just because their price falls. Don’t put all your money on one card, but buy stubbornly and steadily into the market.
You had months to prepare for such a storm. Now it’s probably here. But it will not touch you emotionally. You know that you own excellent companies that have been through severe crises. They will also get through this crisis.
Think about how you will invest if the cannons continue to thunder. In the ruins of the crises has always been the beginning of the new upswing. It may take time, but it will come. Be patient.
Invest in established profitability, not in fantasy dreams
Suppose someone gives you USD 1 billion on the condition that you have to make two equally large investments. Which companies would you choose? Would you invest in penny stocks that could potentially increase your investment tenfold? Or would you prefer to take the safe route and invest in two established and boring companies? I would buy two boring profitable companies.
Many people would also take the safe route with such high amounts. They voluntarily forego returns to get more security in return. Nonetheless, with smaller amounts, they would make instead 50/50 and put one half into a gambling paper, which might be a trap. Investors underestimate that even for a penny, the most important rule is not to lose that penny. It does not matter whether it is USD 100 or USD 1 billion. Therefore you should not see smaller amounts as gambling but also as serious investments.
So make sure you invest in the right companies. You want the companies to pay your rent and feed your family. This only works if companies generate profits or at least cash flow (especially in the beginning). You cannot buy bread from colorful fantasy dreams if there is no profit. It is simple as this. Even if the prices of these losses accumulating and not growing huts rise and rise, do not let yourself be unsettled. The price of a share is not what matters, but what you get for it. Value investing is far from being dead, and that is a good thing. All you need is a strategy and a lot of patience. Time will do the rest.
So don’t be upset if you haven’t bought a share and it has increased tenfold within a short time. Investing is not a race, and the current prices are only snapshots. Even Warren Buffett missed Amazon, Tesla, and Apple.
All the best,
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