Is it really the time to buy?

By Larissa Fernand |  28-03-20 | 
 
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About the Author
Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

The consensus is that the coronavirus has forced the world into a recession, some even say an unprecedented depression.

The pandemic has led governments to impose nationwide lockdowns, shutter businesses and restrict the movement of individuals. This has slowed down the spread of the virus and has had an extremely positive impact on the environment. But the economic cost will be inordinately high. A contraction in GDP growth is imminent. Consumer spending has taken a beating and will be further dented.

But will it last forever? No. Eventually, economies will get on track, though one cannot really expect a business-as-usual recovery. Governments across the globe are offering business specific tax cuts and grants, coming up with stimulus packages, or pumped liquidity into their financial systems. Hence, it does not seem right to blindly apply normal lag times and extrapolate normal decline/recovery relationships.

Which brings us to four relevant questions that as individuals, and investors, we are grappling with.

I find that these were aptly answered by Howard Marks of Oaktree Capital in different instances over time. I mention the source for each, and deliberately state the date. You would see for yourself, that his perceptivity is timeless.

Q1. Do you know where the market is headed?

I do not believe in predictions.

We should never deceive ourselves into thinking that we have anticipated all the issues and that we know what is going on. The market thinks about certain ones. It anticipates those. It may reflect those in prices. The market really is always at the risk of something that nobody has anticipated.

We never know where we were going, but we sure ought to know where we are. Predicate your investment decision on an understanding of where we stand in the cycle today.

While it is possible to know where we stand in the cycle today, it is not possible to know what is going to happen tomorrow.

Where we stand in the cycle determines the probability distribution of returns that investors would face in the cycle. They should know what that probability distribution would look like, when it is in their favour and when it is against them.

Source: October 17, 2018

Q2. Is this the time to buy?

I think it’s okay to do some buying, because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be.

What I would do is figure out how much you’ll want to have invested by the time the bottom is reached – whenever that is – and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left (and hopefully the nerve) to buy more. That’s life for people who accept that they don’t know what the future holds.

But no one can tell you this is the time to buy. Nobody knows.

Source: March 3, 2020

Q3. Should you wait for the market to bottom-out before buying?

We’ve seen record percentage declines several times within the last month. Enormous losses. However, every one of those declines was followed by similar gains. Given that almost all of the biggest down days in the last 80 years were followed by up days, so far the strategy of “buy the dips” has continued to be in favour. That’s fine as far as it goes, but it has nothing to do with fundamental improvement.  

Typically, the bottom is reached only when optimism is nowhere to be found. “The bottom” is the day before the recovery begins. Thus, it’s absolutely impossible to know when the bottom has been reached.

Oaktree explicitly rejects the notion of waiting for the bottom; we buy when we can access value cheap.

Even though there’s no way to say the bottom is at hand, the conditions that make bargains available certainly are materializing. Given the price drops and selling we’ve seen so far, I believe this is a good time to invest, although of course it may prove not have been the best time.

No one can argue that you should spend all your money today. Equally, no one can argue that you shouldn’t spend any.

The more you want to garner potential gains and don’t mind mark-to-market losses, the more you should invest here. The more you care about protecting against interim markdowns and are able to live with missing opportunities for profit, the less you should invest.

But is there really an argument for not investing at all?  In my opinion, the fact that we’re not necessarily at “the bottom” isn’t such an argument.

Source: March 19, 2020

Q4. Are we heading towards a recession?

We’re always heading to a recession. The question is this year, next year, or five years from now.

Source: September 19, 2019

As can be seen, the wisdom is sourced from 2018, 2019 and 2020. But the relevance is apt and the insights, ageless.

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