A student recently asked me for investing advice, leading the question with the fact that the resulting condition of the global economies, a function of the COVID-19 pandemic, seemed to have made this time now the most opportune to buy stocks and, presumably, sell them soon for a quick profit.
It was the type of question that was looking more for validation than speculation.
He had asked because I once mentioned that for two decades, I have spent more time than I would like to admit trying to understand the market forces, evolving industries and company valuations, all in an effort to find the secret investing algorithm myself.
The truth is, if I could give useful investing advice, I would be in the business of giving useful investing advice. Maybe more important, if I was good at investing, I most certainly would NOT want to provide my secrets of good investing to others.
Why? Because of market equilibrium.
What this means is that markets are pretty efficient, and buying opportunities — such as those that might be perceived as arising from a global pandemic — have already been priced into stocks.
Short-term investing requires the ability to identify inefficiencies, or arbitrage, which allow you to know something others don’t, and therefore be able to take advantage of it by buying or shorting a stock, derivative, etc. Most inefficiencies or arbitrage opportunities are spotted early by much smarter and capable people, or more likely algorithms or AI today, which corrects the price almost immediately.
It is simple supply and demand.
If your goal is to make money immediately, they you are almost better off learning how to play poker and trying your luck with cards.
More important, if you ARE privy to insider information, it is illegal to use that information to benefit from buying or selling stock. Martha Stewart went to jail for this, and William Barr is currently in hot water for selling stock prior to the COVID 19 debacle.
So, to successfully invest short-term, you need to predict the future, and as we know, nobody can do that. Now, you can be very knowledgeable in a field and make good predictions, but that would require you to be able to read financial reports and value companies as to identify when a stock is under (buying opportunity) or over (shorting opportunity) priced.
One of my favorite clips in this regard is from HBO’s Silicon Valley. Although hyperbole, there are most certainly people in this world who track the price of sesame seeds, among other things.
And, even when you think you can predict the future, something happens that will rock all of your prediction to the core … such as, hm, I don’t know, a worldwide pandemic?
So, when it comes to investing, here is what I can and will tell you … invest for the long-term.
I know, that is what everyone says. It is not cliche, however, and you have to put some weight into the fact that everyone says it. In fact, this article popped into my feed as I was answering this question:
Market Watch, Mark Hulbert: Opinion: Don’t even think of owning stocks unless you’re willing to buy and hold for at least 10 years
Because when it comes to predicting the future, the data does not lie … investing long-term does pay off.
In regards to this statement, I feel I must give this generic discloser provide by all investment analysts: Ultimately, who the f^@% knows.
Pandemic aside, here are a few things that could and most likely will completely reshape investments:
China is a growing world power, probably surpassing the US in the next few years in terms of global influence, although most certainly in GDP. And you have to watch India. What will the global landscape look like when global influence is shuffled?
The US birthdate is declining, now the lowest it has been in 40 years (1.78 births per mother), and still declining. If we are not replacing ourselves, then our economy will struggle to grow … period.
The global age gap has grown to 30 years from 21 in 1970. Not only does this jeopardize future economic growth, but also the current landscape of consumerism.
And while we are on consumerism, it is impossible to predict what will happen once the threat of this pandemic is lifted, and we all assess what the new normal is to be. I can only imagine many people will play it safe, continuing social distancing, saving money and changing their consumer behavior.
But, then again, who knows?
So how do you calculate all of those forces in order to find investment opportunities? Again, it comes down to fundamentals: Understanding company valuations, learning about economies, industries, and markets, and applying all of these in a buy-and-hold strategy.
Need an example? Consider Warren Buffet, the Oracle of Omaha. It is widely known that he consumes content by reading company financial statements and industry reports like teenagers consume content on TikTok. Using these insights, he applies financial models to identify companies that are undervalued (currently priced below what he believes they should be), and he buys and holds.
In the late 1990’s, Buffet’s wealth shriveled as everyone raced to tech and internet stocks. He did NOT invest, because he felt the underlying businesses in many of the companies did not support the price. And as others left the security of solid stocks, the likes of which included Fruit-of-a-Loom underwear, the prices of these businesses dropped … and Buffett bought.
He held until after the 2000 crash, in some cases still holding his positions, and went on to become one of the wealthiest people in the world.
That’s all I can tell you for now. If I had money, I would be looking to the companies that got hit hardest by this pandemic, the ones everyone abandoned. Prices are probably pretty reasonable right now, but the company has to be able to survive this pandemic and what lies beyond (see above).
So, to summarize:
- Understand the fundamentals
- Invest in stable companies for the long term
- Avoid watching your stocks
- Buy low, sell high
Too boring? Learn to play poker.