The Wrong Way to Invest Post-Coronavirus
COVID-19 (the Coronavirus) has exacted a devastating toll on the world in both health and economic terms. It has devastated economies – halting entire industries and putting countless workers on hiatus or out of work entirely.
In the span of a little more than the month, the stock market has shed more than a third of its value – all over something that has caused less than 500 deaths in the U.S.
Many don’t consider the massive U.S. government’s response to combat the pandemic an overreaction, but many question whether the massive selloff on Wall Street might be.
Many investors following the herd and driven by a fear of being left behind have followed the masses and liquidated their stocks in droves – driving the market towards full-blow recession levels.
Nobody’s certain if stocks have reached rock bottom, but once it does, millions of investors will be on the sidelines after shedding their stock positions out of fear.
Then just as sure as the market will hit rock bottom because of COVID-19, it is just as confident that the market will recover as people recover from the health effects of the virus.
Those currently on the sidelines or will be on the sidelines will have investing options and approaches to weigh as the economy recovers.
Here are a few alternatives:
Following the Masses –
Many investors will stick to what got them all to rock-bottom in the first place – by following the masses. Instead of forging their path and establishing a clear set of principles to avoid being back in the same desperate spot as the last recession, they will continue to ride the Wall Street roller coaster.
Ultra-wealthy investors have known for years, the secret to riding out downturns is to invest in companies with reliable track records with a history of profitability that provide investors with cash flow in a recession-resistant industry.
Savvy investors don’t leave their investing fortunes to the latest economic figures on GDP, CPI, unemployment, monetary policy, consumer confidence, etc., where the markets rise and fall with the news cycle.
To invest in a recovery, investors who followed the masses down the rabbit hole in the last recession would do well to heed the advice of Warren Buffett to do exactly the opposite of what the herd is doing. “Be fearful when others are greedy and be greedy when others are fearful.”
Waiting too Long –
Many investors wait too long to get back in the game during a recovery.
The problem was when these investors cashed out during the fallout; they sold at the lowest prices. As a consequence, the longer they wait to reinvest, the bigger the gap between the prices at which they reenter and the prices at which they sold. That’s why many investors never recoup their gains after a recession.
During the last Financial Crisis, a vast majority of investors never recouped their more than 50% loss in value of their portfolios because they waited too long to get back in the game. That’s why in the beginnings of the Financial Crisis, Warren Buffett was urging investors that rock bottom was precisely the time they should be investing.
Savvy investors don’t wait for the economy to recover before investing. They will always have reserves on hand that they can tap to pick up bargains. That should be an indication to the rest of the investors out there not to wait too long to start reinvesting. The longer you wait to invest in an upswing, the bigger the hole you’ll have to dig yourself out of.
Risk it All –
Like a poker player that digs themselves a big hole, some investors will go all-in to recoup all their losses in one shot.
Ignoring sound investing principles, and instead of investing in solid companies with strong cash flow in a volatility-resistant industry, the impatient investor will chase the worst-performing assets with no track record of cash flow that are – worse yet – highly leveraged, cyclical, and speculative.
- Speculation and liquidity are what cause stock market volatility in the first place.
- Most investors are happy to follow the herd chasing the next shiny object – ignoring boring but established companies with strong track records in a recession-proof industry that provides investors with cash flow even in a recession.
- Follow the successful minority of ultra-wealthy investors who don’t follow the herd. They don’t even play the Wall Street game.
The ultra-wealthy are investing NOW – at or the near the bottom of the downturn – not waiting for a full recovery.
Investors would benefit from following the example of these successful investors by:
- Not waiting too long to reenter the game.
- Not following the herd.
- Knowing the difference between playing the lottery and playing the long-game to win.
That’s why the ultra-wealthy invest in cash flowing alternative assets immune from Wall Street collective madness with a long investment window that prevents herd mentality.
It’s a recipe for not only surviving a recession but thriving in a recovery.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.