Can you make money from a downturn in the market?
Many are asking (and the financial press is breathlessly reporting) as bad as things are in the stock market, whether this is a good time to be buying stocks. After all, eventually the market will recover and these stocks will go up in value, right?
Right. But the question is, which stocks and when. Both are tricky questions to answer without a time machine. As a small investor, picking stocks and trying to time the market is just gambling, plain and simple.
We have experience with this - a little more than ten years ago, the last time the market tanked. As you may recall - or don't, as human economic memory lasts only 18 months, in my estimation - the real estate market collapsed in a flaming pile of shitty mortgages and overpriced condos and mini-mansions, not to mention mortgage fraud. The stock market, which had financed a lot of this crappy debt with something called "reverse default swaps" also tanked as well.
In February of 2009, just as Obama took office, it bottomed out, and then started the longest bull market in history - which eventually was going to collapse, particularly since Trump goosed it with more deficit spending, low interest rates, and unnecessary tax cuts - which is why we are where we are today. Oh, and a virus thingy, but that is secondary - really. Long term, our problem isn't the virus, but the systemic problems in our financial system caused by the party of "fiscal responsibility" who has abandoned all sense of fiscal responsibility. But I digress - or did I?
Back then, I had a few dollars in my trading account. I decided to be a "playa" and buy some stocks I was sure would go up. General Motors - my alma mater - was in the tank. But GM would never go bankrupt, right? I may not have been a fan of their products at the time, or their bloated management structure or corrupt indolent union, but they certainly were too big to fail, right? So I threw a few thousand dollars at that.
Fannie Mae was another pick - after all, they guaranteed the mortgages for most of the country, right? And this quasi-government corporation would surely be bailed out by the Government that created it, right? So I threw a few thousand at that, too.
Finally, there was Avis. The press was abound with stories that Avis was going bankrupt - people stopped traveling and car rentals were in the tank. By that point, all I had left in my trading account was $750, so with a $9.99 trade fee (remember those days?) I bought 1,000 shares for 74 cents apiece.
And then I forgot about the market for several months. Even looking at my 401(k) was a painful experience. As you can see from some of my older postings, I even stopped calculating my net worth at that point. We did do a lot of partying, though.
Later on, when the dust had settled, I found I lost my entire investments in GM and Fannie Mae stocks. But that Avis stock went up over 1000%. My $750 investment was worth over $7500! In other words, it neatly made up for my losses in the "too big to fail" companies. Oh shit. It is why I say, never confuse getting lucky with being brilliant. Throw 1,000 darts at a dartboard, one will hit the bulls-eye. This doesn't make you a darts champion, though.
Picking the right companies is problematic. Today there may be some airlines that go bankrupt - even with bailout money. Prior to the "crisis" we saw inklings of trouble, particularly overseas, with low-cost or government-run airlines, many of which were hobbled with debt and excessive costs. They were already going belly-up, leaving travelers stranded on a moment's notice. It was in the papers, people! But few cared - some British "package tours" people stranded, or folks in India or Pakistan - it doesn't affect us, right? Right?
And the car companies. Before the virus, they were offering "employee pricing" - something they did during the last recession - and zero percent financing. Even with these boosts, they were predicting that 2020 would be a slower year and cut back on production ahead of time. Again, this was all in the papers, but few cared. Hey, I don't work in an auto plant. Nothing is happening - right? Didn't ya see how the Dow is doing? All time highs! And we chose not to think about it.
Then there are the retailers - in the US and abroad. Much ink was spilled about how "online retailing" and Amazon put these companies out of business. But the reality usually was, these companies were leveraged with debt, often by our friends the "Venture Capitalists" who milked those junk bonds for all they were worth, paid themselves handsome bonuses, and then allowed the shell of the company to collapse, taking the pension liabilities with it. This too, was in the papers. Few bothered to care. So what if one of five sporting goods chains goes bust? We had too many for the market to support, right? Same for electronics stores, or office supply stores and so on and so forth. These companies expanded quickly, using leveraged debt, hoping to put "the other guy" out of business. Today, only one of each remains standing, for the most part.
Who will survive the remaining rounds? Lowes versus Home Depot? Michaels versus Hobby Lobby? Beats me. Maybe both will survive and prosper. You'd have to do a boatload of research on debt load, overhead, market trends, locations, cash-flow and so on and so forth.
Therein lies the problem. When I bought companies during the last recession, I didn't really do much research because I couldn't. There is a guy on Wall Street whose job it is to spelunk the quarterly reports of the major automakers. Probably one guy - or an entire department - just to think about GM stock and bond prices. They do this 24/7 for decades. You've spent ten minutes reading press releases and looking at the stock price trends. Who do you think is going to win?
So forget stock picking. Choosing an individual stock you think will survive the recession is a crap shoot. Unless you have done an awful lot of research, it is just gambling. And even if you did the research, shit can happen - like this virus thing - that is unpredictable and unexpected.
Then there is the timing. When will the market bottom out? We've seen huge drops and huge increases - swings not seen since the 1980s - or more ominously, since the 1930's. A lot of people think the stock market in 1929 crashed and then slowly recovered through the 1930's, but that really isn't the case. Prior to "Black Friday" there were wild swings in the market, and it wasn't until later that "the bottom fell out". During the 1930's, recovery was painfully slow - and there were mini-recessions, such as in 1937-1938 which dampened recovery somewhat. Imagine that - a recession during a depression!
Oh, right, I forgot. Today's generation has it worse than any preceding generation before it! The "Greatest Generation Ever" had to endure the depression, and then got drafted to go off and fight the Nazzies. Kids today - they want to become Nazzies - or Communists, or Socialists, or whatever. The parallels to today and the Wiemar republic are frightening. It is only a matter of time before they come after the Gays and the Jews. Well, let's hope not.
But getting back to topic, the market may have already bottomed out or may hit another bottom in the near future. Which is it? Just guessing,but I suspect we'll see more bad news before we see good. Even with the bailout, many companies are going to report some pretty shitty earnings and poor balance sheets at the end of the next quarter - and the quarter after that. Consumers (e.g., human beings) will be spending less in the coming months. The working class, missing a few paychecks, will be playing catch-up on their bills. Those with money will be reluctant to spend, given how their 401(k) has been ravaged. Nervous seniors will be hoarding cash, worried they may run out of money in retirement. The economy may be in recession for quite some time.
Recall that after the 2008 meltdown, foreclosure sales were going on for years afterword. In fact, there are people today who are still clinging to upside-down homes from that debacle. After the collapse in 1989, I was buying foreclosure properties at late as 1994 and "distressed sale" properties in 1998. We bought the condo in 1998 and paid less for it than the previous owner did in 1988. She was glad to unload it!
So there could be quite a long time of depressed prices in the housing business - it may take years for prices to recover. Timing the market there could be difficult.
It takes a while for people to read the writing on the wall and give up. After the 2008 debacle, I knew a lot of people who lost their high-paying jobs. Six-figure jobs like "human resources manager" which seemed redundant when there were no human resources left to manage. They hemmed and hawed and tried to find a job just like the one they left and often stayed unemployed for years. But most threw in the towel and found a second career - sometimes paying more than the first, most times paying less. It takes time for people to give up.
Just as it takes time for companies to give up. Radio Shack and Sears, for example. People predicted their demise in 2009, but Radio Shack hung on for a long time - then went bankrupt, re-emerged as a private equity company and then finally crashed. Sears had momentum to survive nearly a decade before it, too, went bankrupt and re-emerged as a privately held company. Do you think it will survive this latest round? Who knows? It takes time to kill a vampire - or a zombie. This doesn't make them good investments, though!
So.... if you can't pick the right stocks and you can't time the market what should you do? Sit in a corner, cowering and whimpering and closing your eyes and hoping it all goes away? Well, that's no answer either. But sometimes doing nothing is better than doing something.
I sold out my IRA last year and the money is sitting in a cash account (still in an IRA of course - I don't want to pay taxes on it!). I need the cash, as I am retired, and the prospect of "making money in the market" seemed pretty marginal given my time frame for investment. Mark left his IRA in mutual funds, and they dropped 30% or so. Given his timeline - five or ten years behind mine - his funds will likely recover.
The worst thing he could have done was to sell out after the crash. This ends up locking-in losses, which may be difficult to recover from. I recounted before an oldster here on the island who, in February 2009 said, "I sold it all! I wanted to get out before it got worse!" But of course, it didn't get worse, it got better, and if he tried to buy back in, he would be buying back the same funds or stocks for $1.50 that he sold for $1.00 months earlier. Buy High, Sell Low - the sure route to bankruptcy!
Of course, what is an old guy doing with his money in high-risk stocks anyway? Oh right, greed and fear, the two things that drive the market. Greed kept him in high-risk, high-yield stocks at an age he should have been in safer, lower-yield investments. Fear made him "sell out" at the bottom of the market. Since then, he has passed on. His wife was left pretty destitute.
So, if you didn't sell before the crash, I don't think now is the time to sell. But that is your choice, not mine, which is why I don't give advice.
Us "little people" don't have working time machines or the ability to research these companies and funds to understand what is and isn't a smart pick. All we have in our arsenal are time, diversification, and dollar cost averaging.
If your investment timeline is in decades, not months or years, your investments should recover over time. And over time, you should move to more and more conservative investments, so when you need the money - as I do now - it is there, and not plummeting in value due to the next recession (and there will be one).
Picking one stock or one fund is literally putting all your eggs in one basket. If that basket breaks, you are screwed. Oh, sure, I've heard the mantra before, "Put all your eggs in one basket and then watch that basket closely!" But what happens when the handle breaks? You can "watch closely" as all your eggs break. Diversification is the key for the small investor.
Dollar cost averaging also makes sense - to some extent. If you invest over a period time - a small amount every month, such as a 401(k) deposit, you average out the fluctuations in the market. As I noted before, this is not an investment "strategy" but rather the way most of us are forced to invest, as we only get our money in dribs and drabs in these bi-weekly things we call "paychecks".
So maybe the best thing to do, is to do nothing. That geranium may look down and out, but when winter turns to spring the flowers bloom. Sometimes the best thing to do is leave well enough alone.
And in retrospect, that is what worked best for me the last time around. In 2009, I stopped even checking my investments, for months on end. Not only was it depressing to do so, it was a temptation to "do something" when doing nothing was a better option.
For the small investor, it is foolish to think one can outsmart or out-time the market.