For stock market investors, the past month has been one of the most stressful times of their lives when it comes to investing. Share indexes have crashed beyond expectations. In about a month, the S&P 500 has fallen by about 30 percent.
Just when the U.S.-China deal was giving investors hope of strong market performance, the CCP coronavirus outbreak spread global panic. As an investor, deciding how to bet your money during such a difficult time is a nerve-wracking thing.
Fortunately, we can look at the teachings of investing giants to show us the path to making good bets. One such excellent investment master was Benjamin Graham, the mentor of Warren Buffet.
Investing the Graham way
Graham had a simple philosophy of investment that was based on identifying what kind of risk taker you are. Ask yourself whether you are an investor or a speculator. Though they both bet money on stocks, their drive is different.
An investor’s primary concern is identifying reliable stocks at bargain prices that he can hold on to for a long time. A speculator buys stocks anticipating that he will profit from future market fluctuations in the short term.
In the current market scenario, think of what kind of investment you wish to make. Do you expect the current crash to recover fast over the coming months and wish to capitalize on the recovery? If so, you are a speculator who should focus on short-term trading.
Are you an investor who wants to secure stocks for the long term? If so, identify well-established companies with strong financials whose stock prices have been clobbered recently. Invest in them and ride out the bear market.
Benjamin Graham was a mentor to Warren Buffet who taught Warren about investing. (Image: Equim43 via Wikimedia Commons)
A major difference between an investor and a speculator is their appetite and nerve for handling market risk and the pressure that comes with it. A speculator is looking to make money quite soon. In such a volatile market, if prices were to drop further, can you hold on to the stock or will you get nervous and end up exiting your positions?
If you are the type to panic, you will be better off not making any speculative bets. A long-term investor is never concerned too much with such short-term extreme fluctuations. After all, stock markets do go up and down. That is the nature of the market. He or she is only focused on what the stock price will be 5 or 7 or 10 years down the line.
When judging a company, Graham points out some of the important aspects we need to analyze. These include the liquidity of a company, its price-to-earnings ratio, price-to-book ratio, earnings growth, dividend record, and financial leverage.
The bear market
To keep stock markets stable and provide hope to the economy, the U.S. Federal Reserve recently committed to creating an unlimited amount of money. The Fed hopes such a move would stave off recession and keep the American economy running.
However, the markets ended up shrugging off the announcement without any significant gains, indicating how serious the threat of coronavirus was weighing in on investors’ minds.
The Federal Reserve recently committed to creating an unlimited amount of money. (Image: Dan Smith via Wikimedia Commons)
“It has become clear that our economy will face severe disruptions… Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate,” the Federal Reserve said, as reported by CNN. According to Credit Suisse, stock markets will likely bottom out only when the daily coronavirus infection rates peak and do not keep increasing.
This pandemic is quite unlike other downturns, that’s for sure. When you invest in the markets, make sure you understand who leads the companies. This is because a large number of CEOs have been exiting their positions during the past 2-3 years.
When a company leader quits and dumps his/her shares, there must be a solid reason for that. Find out why, before putting your hard-earned money into the enterprise.
The other major factor to consider before investing in companies is their relationship with China; more specifically, the Chinese Communist Party. The more a company is invested in the CCP, the more volatile its stock and overall market positioning will be in the coming years. So stay safe, and do not invest in companies doing deals with the Communist Party.
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