Written by Clarence Bick
COVID-19 has caused a lot of people — our clients included — to ask a single, pertinent question: Is now a good time to invest?
It’s a good question to ask. Since the February 19 & 20 stock market peak, the market has experienced record-setting drops and rises. However, we’ve never advised clients to invest on the basis that recent market movements are helpful in predicting future market movements.
But rather than be hasty about investing, let’s take a more balanced approach. Our short answer is a clear, “it depends.” By that, we mean: It depends on what you think the question is asking.
Has the stock market bottomed?
If you’re asking, “has the stock market bottomed?” We’ll tell you that we don’t know, and we’ll also tell you we don’t think it’s relevant.
Let me explain. The stock market is a place where shares of a business are bought and sold. The particular business share that is being transacted is the investment. A transaction means that the seller thinks he or she should sell now because the price for his or her company is too high, and the buyer disagrees and thinks the price is too low.
We believe the focus should be on the business itself, not on the stock market — and whether or not it has reached “the bottom.” You too should be making a decision based on business fundamentals. If the business is a good one that’s poised for future growth once the COVID-19 pandemic passes, you should buy. If it’s not, then don’t.
Is this a good time to invest in a business?
If you’re asking, “is this a relatively good time to invest in a business?” We’re confident the answer is qualified “yes.” There are several reasons why.
- Making investments now poises you for profit. — The qualified “yes” does not mean that we’re predicting stock prices have bottomed. We know that history shows the vast majority of five-year time frames are positive on the stock market. An investment after a drop of 30% has an even greater rate of profit over five years or longer.
- Your fund managers are buying. — The full-time, professional and proven fund managers we place client money with, who in some cases have decades of experience, are on a buying spree. These managers have reduced the cash in their funds, buying specific businesses whose share price meets their price targets. Their current actions are consistent with previous stock market downturns when they bought great companies at fire-sale prices.
- Executives are seeing a surge in buying. — Insiders (corporate executives) have had a surge in the buying of their company shares in the last few weeks. These insiders are confident they know the businesses they’re managing, and because of this, they’re buying. This is consistent with insider trading in past stock market low points such as November 2008 and March 2009.
- There’s no reason not to be enthusiastic about buying. — In February 2020, when stock prices peaked, investors were enthusiastic about stocks. Now, with a net drop of about 30%, they’re nervous. If there was enthusiasm to buy at $100, shouldn’t the prospect of paying just $70 be more enticing?
If you stay the course, you’ll see growth over time.
Ultimately, the purpose of a business is to make more money than any other alternative. History shows this to be true. Stocks represent the ownership of the businesses that provide the goods and services we want and need.
We believe being a capitalist, which means being a business owner in a capitalist economy, is simply prudent. Providing you have an appropriate timeframe and the ability to live through some significant price volatility both now and in the future, you’ll see growth over time.
All that being said, we encourage you to continue investing while keeping the above information in mind. If you’d like to speak with one of our advisors to go over your portfolio, set up a phone call.