As I write this, the ASX is down. Again. Yet has rallied some 5% from its earlier lows!
Actually, scratch that. I checked again, and it’s up 1.3% today!
Which is pretty much the sort of volatility we’ve suffered recently.
If you’re feeling a little punch-drunk, you’re not alone.
It’s been a helluva week.
The market is setting lots of ‘…worst since…’ records, at the moment.
The falls have been steep, and they’ve been reasonably sudden, at least in an historical context.
So, here we are.
As I’ve said — and I’ll keep saying, because it’s a really important message — there is no way of knowing, now, how far things fall before they recover, or how long the falls will last.
Unfortunately (or fortunately) there’s no straight line correlation between world events and share prices.
We can’t just say ‘the pandemic will last X months, therefore share prices will fall for X months’.
Nor can we say ‘When health data shows X result, then the market will bottom’.
Here’s why: stock markets do — and are supposed to — look forward. When they’re working properly, they take a guess as to the short- medium- and long-term future, and roll all of those together in a single share price.
The two key inputs are profits and sentiment. The former is a rock-solid number. The latter is a squishy guesstimate at the best of times.
Sentiment is measured not in raw numbers, either, but in ‘delta’ — in plain English, ‘change’.
Shares fall when investors go from ‘hyper-irrationally-optimistic’ to just plain ‘irrationally optimistic’, because the future is slightly dimmer than it was previously.
Equally, shares rise when sentiment improves from ‘We’ll all be ruined’ to ‘This will be really, really bad’.
Which is what makes ‘picking the bottom’ so hard as to be essentially impossible.
It’s possible that sentiment improves, even as the Coronavirus facts keep worsening, because investors decide that share prices reflect a worse final outcome than is likely.
It’s possible that sentiment worsens, even as the epidemic improves, because investors can’t accept that the worst is over.
It’s probable that the actual outcome will be somewhere between those numbers.
My guess — and I’m not betting on it — is the former.
Whether investors, as a group, just learn to live with Coronavirus…
…or whether dispassionate calculus replaces lemming-like fear…
…or whether the facts don’t change, but stocks are just too cheap to ignore, because prices reflect an unreasonable level of pessimism…
… or something else.
I could be wrong.
The good thing is that I don’t have to know. At least not to make money, investing.
I’ve been buying.
I intend to buy again next week, circumstances (including our trading rules) allowing.
Not because I have super-human foresight.
But because if you don’t have the ability to see the future, your best refuge is likely to be historically-informed probability.
The ASX goes up more than it goes down.
It goes up more often than it goes down.
It’s never failed to make new highs after a fall.
Are those guarantees? Of course not.
They’re past events that, in all likelihood, give us a very good sense of what the future might look like.
Here are my long term predictions:
I think the economy recovers, in time.
I think quality businesses sell more, and deliver more profit, in the future than in the past.
I think dividends, often fully-franked, will be higher in the future than in the past.
I think the stock market will continue to compound meaningfully, over time.
Now, if those things are true — and they were as true 3 months ago, but share prices have since fallen…
… doesn’t it make sense to be buying shares at meaningfully cheaper prices?
Of course, just because a company’s share price has fallen doesn’t immediately make it worth buying — plenty of bad companies have had their share prices cut!
But if you liked a company (or an ETF) one, three or twelve months ago, there’s likely little reason not to like it now… but you’re possibly being offered a better price.
Let’s say I offered you a $10 note.
Let’s say I offer it to you for $9.99.
You might be interested, but probably not.
Let’s say I start slowly dropping my offer price. At some point — you can’t know when — I’ll take the offer off the table.
My offer gets to $8.
You don’t know if it’ll go lower.
My next offer could be $7, or it could be $9.
Now, you could try to play the odds, but why would you?
You’re getting a 20% discount now.
Let’s say you buy at $8 and I tell you I would have offered $7. You might be annoyed with yourself.
“I knew it!” you say.
Maybe I was. Or maybe I’m joking. Maybe my next offer was going to be $9, after all.
Did you really know it, after all? Or are you letting hindsight bias cloud your judgement?
I think we’re being offered the metaphorical $10 for $8 right now.
Maybe we’ll be offered $7 at some point in the future.
Maybe it’ll never be as low as $8 again.
I’d humbly suggest that’s the wrong way to think about it.
I think you should be thinking “Man, $8! I’m not looking that gift horse in the mouth”.
That, in a nutshell is why I’ve been buying, and why I intend to continue doing so.
Not because I know what happens next, but because I think today’s price is attractive enough to give me excellent long-term returns.
Which, after all, is the bigger point, when you look at it from 40,000 feet, rather than the hand-to-hand investing ‘combat’ we engage in day-to-day.
I hope that perspective is useful for you, going into the weekend.
God knows, you and I won’t get much respite from the flood of negative news and headlines over the next two days!
So, as something of a long-term-oriented antidote, the team and I wanted to share a couple of things with you.
If you didn’t have the opportunity to make it to our Facebook Live Q&A yesterday, we have a recording of the video, here (I’ve never looked so good as I do with a big, blue ‘play’ button over my melon!):
And if you’re into podcasts, or want to get started, I’d encourage you to subscribe to our very own podcast, produced in conjunction with Triple M, called ‘Motley Fool Money’ (you don’t have to see my mug on that one!).
Our latest episode, recorded this morning, should be up by the time you read this.
If you’re an Apple user, click here to subscribe, otherwise, you can search ‘Triple M Motley Fool Money’ in your favourite podcast app (I use Pocketcasts, for the record).
Fools, I don’t know if there are more falls due next week. It’s possible. I don’t know whether the recovery starts Monday… or in many Mondays’ time.
What I do know is that regular investing, in a diversified portfolio of quality businesses, purchased at decent prices, has always been a wonderful way to build wealth — and something I fully expect to remain the case well into the future.
Stay the course, Fools. Not because it’s easy, but because it’s worthwhile.
Have a great weekend.
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Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.