Bear Market Strategy

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Billionaire investor Warren Buffett, founder of Berkshire Hathaway, provided sage advice for sustaining wealth and sanity during a bear market in his 2016 letter to shareholders by conveying to “stay in the market and buy at a bargain”. Furthermore, Buffett wrote:

“During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.” Warren Buffett

In other words, investors with a long-term perspective, a declining market can be a buying opportunity. Consider buying ownership shares of businesses with superior balance sheets and robust free cash flow when the market has them on sale.

Bear Markets

A bear market is Wall Street’s term for an index like the S&P 500, the Dow Jones industrials, or even an individual stock, that has fallen 20 percent or more from a from the peak. On average, bear markets last 14 months in the period since World War II. The S&P 500 index has fallen an average of 33 percent during bear markets in that time. The biggest decline since 1945 occurred in the 2007-2009 bear market.

One thing every investor needs to know about bear markets is that they always seem like the world is ending when you are in the middle of one. Time and time again, when recessions and bear markets occurred, the same thing always happened, they end.

Additionally, the U.S. has gone through many challenges in the past such as the September 11, 2001 (9/11) attack, and we will get through this current pandemic virus challenge as well. By keeping a positive outlook and focusing on the things you can control, we will get through this together.

Stocks Help Build Wealth

When you are looking to build wealth over your lifetime, the more time you have to invest in the stock market, the better your chances of building life-changing wealth.

If you set aside money every month and invested those funds into a diversified portfolio over your working career, you would have benefited from stellar returns on your investments in the stock markets during the last 10, 20, 30, 40 and 50 years.

Try investing a fixed dollar amount on a regular basis into equities. This practice will ensure that you are purchasing when markets are going down as well as going up. This practice is known as dollar cost averaging. Dollar cost averaging will ensure that you realize a better average cost over time.

This too shall pass

This period of uncertainty and challenge will soon pass and life will eventually return to normal. Businesses, places of worship and schools will begin to reopen, and governmental restrictions will be lifted. In the meantime, Americans must remain positive during periods of fear and uncertainty, help others where they can and display fortitude during this unusual period. We all must rely on one another, and we will get through this together.

References:

  1. https://www.berkshirehathaway.com/2016ar/2016ar.pdf, pg 6
  2. https://www.marketwatch.com/story/goldman-sachs-analyzed-bear-markets-back-to-1835-and-heres-the-bad-news-and-the-good-about-the-current-slump-2020-03-11
  3. https://www.kiplinger.com/article/retirement/T047-C032-S014-financial-keys-to-help-weather-coronavirus-crisis.html

Black Swan Events

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An financial or investment plan established during less volatile times should not be abandoned in the midst of a market downturn caused by a “black swan” event.

The Black Swan is a conceptual framework for thinking about potential risks that were both highly destructive and low probability. Author, investor and mathematician Nassim Nicholas Taleb, in his 2007 book about unpredictable events, “The Black Swan”, defines:

  • It is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
  • It carries an extreme ‘impact.’
  • Human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

Pandemic

The novel coronavirus (COVID-19) pandemic is an unprecedented challenge for Americans and continues to be a central focus around the world.  It has had material implications for the economy, fiscal and monetary policy, and global financial markets.

The impact on equity markets thus far has been notable, with the U.S. equity market exhibiting unprecedented volatility than in recent years. These reduced valuations and market swings can present challenges for investors who are investing with
purpose, like those saving for retirement. However, this kind of volatility should not be unexpected.Market downturns are simply part of the saving, investing and accumulating wealth experience. During any 20-year period, the stock market typically will suffer at least three (considered a drop of 10%) and at least one bear market (a drop of 20%).

Stay the course

It is important to stick with an investment strategy to avoid volatility during these downturns.  In the wake of the 2008 financial crisis, an estimated 10% of investors liquidated their entire accounts, with 20% switching to less risky assets. These individuals, unfortunately, mistimed the market rebound and subsequent robust economic recovery. As a result, they were left worse off than if they had maintained a long-term view and stayed the course.

When You Have a Long-Term Strategy | Beyond Your Hammock

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“If you ever hear yourself or anyone you care about starting to express the belief that a problem is permanent, it’s time to immediately shake that person loose. No matter what happens in your life, you’ve got to be able to believe, ‘This, too, shall pass,’ and that if you keep persisting, you’ll find a way.”  Tony Robbins

Most people make short-term and limited decisions without considering how these choices impact things to the right when you’re only looking left. Here’s how to solve that problem.

If we could compare life to walking through a forest, we could say that you pass a lot of trees along the way. And most people tend to obsess over the nearest tree.

It’s just human nature: you focus on the tree nearest to you and you lose sight of that entire forest that is your life.  We must understand that proper planning, deliberation, and insight allows you to step back, see more, and better understand where you are now in relation to where you want to go.

The decisions you make right now should be in the context of everything that’s happening now and the future. You need to understand that the way in which you use your money and the choices you make impact you life now and down the road.

Looking at the forest means taking a step back and understanding how everything is interconnected — and how to make decisions around that.

Henry Ford once said, “Whether you think you can, or you think you can’t–you’re right.” Those who think they can achieve financial freedom can actually do it.

Source  https://beyondyourhammock.com/34/

Chart shows the coronavirus spreading slowly in tropical countries

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Living in a warmer environment doesn’t mean you can’t catch coronavirus. But it sure seems to help.

High Temperature and High Humidity Reduce the Transmission of COVID-19 according to a paper that investigates how air temperature and humidity influence the transmission of COVID-19.

Analysts at Jefferies plotted coronavirus cases in temperate climates — everything north of latitude 23 degrees and south of 23 degrees — and compared them with countries in the tropical and subtropical areas. The brokerage excluded China, where the virus first emerged, from the analysis.

High temperature and high relative humidity significantly appear to reduce the transmission of COVID-19, respectively, even after controlling for population density and GDP per capita of cities.

Chart shows, there’s a big difference.

This result is consistent with the fact that the high temperature and high humidity significantly reduce the transmission of influenza. It indicates that the arrival of summer and rainy season in the northern hemisphere can effectively reduce the transmission of the COVID-19.

Source:

  1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3551767&mod=article_inline

COVID-19 Response: No one should face financial hardship | Consumer Reports

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A letter from Consumer Reports:

The United States is still in the early stages of the coronavirus pandemic, but Consumer Reports is already seeing deep economic impacts as people stay home and businesses close. 

Congress is working on legislation right now to address this crisis, but together we have to make sure our government’s response puts people — not corporations — first. It’s critical that our leaders protect public health and keep Americans financially safe.

Help Consumer Reports in this effort by signing our petition to Congress and the White House: No one should face financial hardship due to the coronavirus emergency!

Consumer Reports is working with lawmakers right now to ensure that all coronavirus-related legislation includes our core principles of fairness, safety and transparency for consumers. As government works to address the urgent problems facing our healthcare system and our economy, it must also focus on people and the hardships they are experiencing. We are calling on Congress to: 

  • Protect consumers from fraudulent and deceptive products, scams, price gouging, and predatory and abusive practices related to the outbreak.
  • Prevent surprise medical bills, including for COVID-19 treatment. No one should be penalized for getting needed care.
  • Provide people undergoing financial hardship temporary waivers for rent, mortgage, car, student loan and other debt payments during the crisis (without extra fees or interest), and a manageable path back to repayment.
  • Prohibit utilities and internet providers from cutting off service or charging late fees until a period of time after the emergency ends.
  • Stop credit agencies from reporting negative information during the crisis so consumers’ credit scores aren’t impacted.

Sign Consumer Reports petition to make sure the government response ensures that everyone — businesses and individuals — are protected from financial hardship during this crisis.

Help Consumer Reports show Congress that consumers want legislation that protects the public health and keeps Americans financially safe. Please add your name, then forward this email and share the petition on your social networks so we have a strong show of support. 

Thank you!

Anna Laitin
Consumer Reports

Sign the petition: COVID-19 Response: No one should face financial hardship

Perspective in a challenging time | Vanguard

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It is said an Eastern monarch once charged his wise men to invent him a sentence to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words, “And this too, shall pass away.” How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!
Abraham Lincoln

At a time such as this, with double or even triple doses of concerning news daily, a little perspective can go a long way.

As troubling as the rapid descent of stocks into a bear market has been, and as much as it can preoccupy investors, we all need to think first about our health and the health of our loved ones. Covid-19, the disease caused by the coronavirus that emerged in China late last year, has been declared a pandemic. The speed at which the disease is spreading has led authorities to take strong measures, including school closures and cancellations of sporting events, on national and community levels.

The disruption to daily lives could be substantial all around the globe. Many in Asia have lived with such disruption, and heightened virus concerns, for several weeks already. It hasn’t been and it won’t be easy, but it’s necessary.

A new, short-term reality

Financial markets clearly are reflecting our new reality, recognizing that the strong response and medicine required to thwart Covid-19’s spread is also likely to blunt short-term economic growth. The result may be a mild U.S. recession, although if it ensues we believe it could be short. We also believe that recession risk is heightened in other developed markets.

In China, where activity is slowly getting back to normal, we expect GDP growth of around 5% in 2020, compared with a reported 6.1% for 2019, with risks to the downside as the coronavirus outbreak plays out among China’s global trading partners.

Read More:  https://vanguardblog.com/2020/03/16/perspective-in-a-challenging-time/

Market Timing

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“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.” Jack Bogle

During the 2008 financial crisis and economic uncertainty, global financial markets were melting down and Lehman Brothers filed for bankruptcy protection.  The resulting economic recession and global slowdown brought unemployment rates in the U.S. as high as 10 percent.  And, the U.S. stock market lost trillion of dollars in value as the S&P 500 experienced a single day drop of 90.17 points, nearly 9.04 percent.

Americans, and specifically American investors, believed inherently that the global economy and financial markets were collapsing.  Fear and panic selling took hold worldwide.  Both professional and retail investors started to sell and it didn’t matter what they sold.  Yet, Warren Buffett was buying stocks that were rapidly falling in price when everyone else was panic selling and sprinting to cash.

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” Warren Buffett

According to Buffett, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” he wrote in the NY Times.

Additionally, Buffett wrote in his 2018 shareholder letter.

“Seizing the opportunities when offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta.  What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”

There are several valuable lessons investors learned from the 2008 financial crisis that can be applied towards today pandemic driven crisis.  The lessons are based on the same principles that allowed Buffett to invest so effectively during the crisis. To sum them up:

  • Don’t panic and sell stocks simply because the market is crashing. When times get tough, Buffett is invariably a net buyer of stocks. For this reason, he keeps billions of dollars in cash on the sidelines — so he can take advantage during times of investors’ fear and panic selling.
  • Focus on best-in-breed companies trading at discounts. A great example was Buffett’s investment in Bank of America and Goldman-Sachs.
  • Don’t try to time the market. Just because the market has crashed doesn’t mean it can’t go down more. It certainly can. Instead of trying to invest at the absolute market bottom, focus on stocks you want to hold for the long term.
  • Understand that no stock or industry is completely immune. Back then, many investors had a disproportionate amount of their portfolio in financial stocks because they were thought to be safe.  Essentially, no stock or industry are safe.

Warren Buffett believes intrinsically that “it is a waste of time and hazardous to investment success trying to time the market”.  In a 1994 annual letter to shareholders, Buffett wrote:

“I never have an opinion about the market because it wouldn’t be any good and it might interfere with the opinions we have that are good.  If we’re right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do. … If you’re right about the businesses, you’ll end up doing fine.”


Bottom line: As long as investors keep a level head and maintain a long-term perspective as Buffett does, investors should come out of it just fine, if not stronger than they went in.

Sources:

  1. https://www.cnbc.com/2018/09/14/warren-buffetts-rule-for-investing-during-the-financial-crisis.html
  2. https://www.fool.com/investing/2018/09/23/10-years-later-warren-buffett-and-the-financial-cr.aspx
  3.  https://www.cnbc.com/2018/05/08/warren-buffett-says-he-never-tries-to-time-stocks-i-never-have-an-opinion-about-the-market.html
  4. https://www.cnbc.com/2018/02/24/highlights-from-warren-buffetts-annual-letter.html

Coronavirus disease (COVID-19) advice for the public: Myth busters | World Health Organization (WHO)

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COVID-19 virus can be transmitted in areas with hot and humid climates

From the evidence so far, the COVID-19 virus can be transmitted in ALL AREAS, including areas with hot and humid weather. Regardless of climate, adopt protective measures if you live in, or travel to an area reporting COVID-19.

The best way to protect yourself against COVID-19 is by frequently cleaning your hands. By doing this you eliminate viruses that may be on your hands and avoid infection that could occur by then touching your eyes, mouth, and nose.

Read more: https://www.who.int/emergencies/diseases/novel-coronavirus-2019/advice-for-public/myth-busters

Before coronavirus crash, many big corporations broke the No. 1 rule of personal finance | CNBC

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Updated: 3/19/2020 5:40 pm

A “rainy day” fund is a reserved amount of money to be used in times when regular sources of income (or cash flow) are disrupted in order for typical operations to continue.

  • Giant employers of lower-wage workers like McDonald’s and Starbucks spent and borrowed money for stock buybacks and dividends.
  • Now companies are trying to tap credit to manage cash, avoid layoffs.
  • Labor unions and experts say all that shareholder money could have gone to worker raises and to shore up the balance sheet during the bull market to better prepare for a financial downturn.
  • The tax cuts of 2017 are also now being scrutinized.

Kitchen-table finance begins with one simple rule:

Have several months’ worth of expenses on hand, in cash, in case something unexpectedly goes wrong.

Some of America’s biggest employers are beginning to discover the truth of this maxim as the coronavirus crisis catches them short of cash just as business crashes. Together, the restaurant, leisure and hospitality, and airline industries account for about 17 million U.S. jobs.

To read more: Coronavirus crash shows major corporations broke No. 1 rule of personal finance