When Mr. Market is panicking, the worst mistake an investor can do is follow along. When the market is in a sell off and every one is losing money left and right, it is crucial for an investor not to panick sell. However, it is easier to give into ideas that are strengthened by emotions. Hence, here are some quick useful thoughts to keep in mind during this time:
– Remember that you control your emotions, not the other way around. Obviously, emotions are important part of being human, it just has no place when it comes to investing. If you catch yourself that you are selling/buying without a rational reason, then you are letting emotion take the drivers wheel.
–The world economy is fine in the long term. Though the conventional measures would show that the world economy has contracted significantly, it is not a true measurement of the future or even present. This stoppage in economic growth was due to a virus outbreak that has limitted the flow of capital in consumer spending and their earnings. Not because a fundemantal economic issue: people would rather be out working and spending than staying indoors and isolated and companies would rather hire. It is as if world economy is a spring that is expanding. This rise was stopped due to a heavy force (corovirus) applying pressure against its natural expansion (economic growth); however, this spring is gathering strenth during this contraction (during the quarantine, stricted air travel etc). Once the heavy force is gone, the spring would jump to a new high (possibly higher than it should) in small period of time. Of course the spring will lose its flexibility (ability to revive from recession) the longer the force stays.
–We have seen improvement in the spread of the pandemic. Many countries are taking critical steps to limit its contraction. As more countries adopt stricter rules, the faster we can recover from this recession. Just as more force pushes down the spring for a less amount of time, the more power we would generate for expansion. Historically, markets have always risen up in substantial amount after a sell off. And this sell off wasn’t because of bad corporate governance or faulty investment vehcles.
–Start thinking about long term investing. No one can tell where Mr.Market is going tomorrow or week later. But there is higher than 50% chance that Mr.Market will be feeling good in the longer term after an huge sell off.
– Don’t start buying unless you are ready to lose little bit more. The common term associated with this is “catching a falling knive.” Some good companies stocks may look like a good deal during sell off. However, the sell off might not be over soon so there is still a chance that the stock will keep going down. If you are not comfortable with losing more, don’t buy yet and wait until you are. Analyze the company’s balance sheet for its sustainability (current asset, EBITDA/Interest etc) and its ability to produce at large capacity when coronvirus spread is over.
If you are an investor, it is important to think long term and believe in the survival of our current society.
