It might seem counterintuitive to think that a time of panic presents the best opportunity to begin investing. I’m sure you’ve heard the famous Warren Buffett quote “be fearful when others are greedy and greedy when others are fearful.” Sure, it may be cliché, but it’s because there’s some truth to it. When people are fearful, they sell everything. Even companies whose negligible exposure to the cause of fear are not immune to market selloffs. When there’s an irrational selloff of companies, you have the opportunity to buy high quality stocks at discounts. I am NOT saying that this selloff was irrational. If anything, I think the little rally is irrational. The stock market has been up even on days with record-breaking unemployment numbers. I’m not encouraging you to go all-in. You don’t know when the market is going to bottom, so stay patient and invest periodically. Always have some cash on hand so you can pounce on dips. Dips can be rational or irrational, but you don’t know if the price will ever be at this price again any time soon. If you’re still decades away from retirement, you need to block out all that short-term noise. What’s the world going to look like 10 years from now? 20 years? 30? These are the questions to ask yourself when deciding which companies to invest in.
In the coming months or even years, there is definitely a lot of uncertainty about our return to normalcy. But what will normalcy look like? The world is always evolving, but not in a way that is discernible to us on a day-to-day basis. However, this crisis will bring on accelerated adoption of certain daily activities that we all knew was already inevitable. In fact, some of these permanent changes are already being implemented in our society. Working from home was already trending upward, but now, we are seeing increased adoption. Facebook will allow employees to work from home for the rest of the year. Twitter will allow employees to work from home forever.
We cannot just wait for the dust to settle. The stock market is always forward-looking and by the time we return to normal, whatever that may look like, the lion’s share of the gains will be gone. Invest in what you think the future will look like. You think the telehealth market has a lot of room for growth? Give Teladoc (NYSE: TDOC) a look. You think working remotely will eventually become widely accepted by most employers? Consider Zoom (NASDAQ: ZM). Mind you, this strategy is not without major risk. You’ll find that many growth companies are not yet profitable because they’re allocating so much capital, a fancy word for money, towards investment projects and research and development to ultimately create a unique product or service. Then the company will want to market it, which will require a lot of capital for a product or service that is still in its growth phase. Sure, you might choose a huge market with a lot of room for growth, but choosing which companies will require a lot more time and research. There is no guarantee that any given company is going to be able to become profitable and then sustain growth and innovation to remain competitive.
Companies that are unprofitable are significantly riskier, so you want to balance it with profitable companies who are not in any danger of becoming insolvent. Liquidity issues have only exacerbated for companies who were already in financial trouble. With that being said, I believe there will be market consolidation in some industries. The companies with healthiest balance sheets will be the ones who will be able to take advantage of this, with the others left in survival mode. They will have the capital to acquire distressed companies at a good price and to hopefully synergize their operations for an enhanced pipeline of their product and service offering.
Simply choosing a few stocks that you found when you googled “growth stocks 2020” or “companies with good balance sheets” isn’t going to cut it either. That’s not research. When it comes to individual stock picking, you need to keep tabs on your companies on a regular basis. You need to closely follow how the industry is evolving and what its competitors are up to. You have to stay knowledgeable in companies and the stock market as a whole as long as you’re invested in them. Managing your own individual stock portfolio is basically a second job. As a financial reporting accountant, and eventually a CPA, I personally enjoy keeping up with the stock market.
Maybe you don’t want to have to stay perpetually informed on a bunch of companies. Perhaps you think doing this type of research is boring (like my dog, Sparky), which is completely understandable. You should decide on investing in a company based on their financial strength, their history of improving sales and earnings, and whether they can keep it up for the foreseeable future. The boredom may derive from the computations of a company’s periodic performance and financial ratios. In other words: a lot of numbers. If it’s not really your cup of tea, I’d avoid picking individual stocks.
Exchange-Traded Funds (ETFs) are a great way to diversify since they can hold hundreds of stocks. A simple ETF that can provide decent returns is the SPDR S&P 500 ETF (SPY). This is basically identical to investing in the S&P 500 index, which includes 500 of the largest corporations in the United States, which is commonly considered to be representative of the U.S. stock market. An investing strategy like this requires minimal research. However, your return will be limited to however the market performs. Additionally, not all 500 of those companies will be performing very well. Since they are 500 of the biggest U.S. companies though, the underperformers will be offset by the outperformers and then some. You can also choose to invest in ETFs that follow companies in certain industries instead. Choosing outperforming industries is a lot easier than choosing outperforming companies.
Hopefully I’ve given you reason to at least dip your toes in the stock market. Which companies will stand to benefit from the permanent, societal changes? Obviously, I don’t want that to come off as insensitive. It’s awful that has happened at all and no one enjoys benefitting from a global pandemic. The reality is that this crisis will bring on change, and it’s a great time for young investors to invest in what is believed to be the new normal.
Disclosure: I own shares of Teladoc