Warren Buffett says that investing is simple but not easy.
Let us reconcile these two data points from two different news sources at the onset of COVID.
The US economy lost 20.5 million jobs in April, the Bureau of Labor Statistics said Friday — by far the most sudden and largest decline since the government began tracking the data in 1939.
Record 20.5 million American jobs lost in April. Unemployment rate soars to 14.7% by Anneken Tappe, CNN Business, May 8, 2020
The same day, this headline…
Dow surges 455 points as economic-reopening hope overshadows historic job losses.
Carmen Reinicke in the Business Insider, May 8. 2020
Or how about this? The Dow peaked at 29,551 on Feb 12th, 2020, when the worldwide Corona virus cases were just getting started. By March 3rd, 2020, the Dow would fall by 37 percent to 18,591. This was the steepest, fastest fall ever. The recorded virus cases stood at 379,236 that day.
But then all of a sudden, the Dow changed direction, rocketing 31 percent off the lows while the virus cases kept on surging.
That sharp violent turn off the bottom, that is a 2,100-point (11 percent) gain in a single day, the biggest point gain ever.
And that is typical. Most gains occur in a handful of days when you least expect it, another nail in the coffin to timing these things. But the economic news continued to remain grim.
So, what warranted that surge in stock prices? How could we have double-digit unemployment with the world literally having changed and yet, the stock market responds as if we are back?
That is because the stock market is a discounting mechanism. It discounts the future to arrive at prices today. We have done that math before.
So, say you own a business that was supposed to generate a series of profits in the future. The stock market takes those profits into account to come up with a fair value for that business and that is what we see quoted each day.
And then something like a pandemic happens. That would impair a few years’ worth of those profits, so the market then revalues that business to a new price.
But then the market realizes that the news is not as grim as what was initially assumed so the market then reprices that business again.
There is no guarantee though. The market’s assessment could be wrong, and it does get things wrong from time to time but that is in the short run. Eventually though, the price and the value of a business will converge.
No one can of course predict these things. You look up any publication in January of 2020 and not a mention of how our world was about to change.
And no one knew how long it would take for things to normalize from the depth of that pandemic or what form that normalizing would take. Most were just voicing opinions, like below…
We’ve seen the lows in March’ for the stock market, says man who called Dow 20,000 in 2015, ‘and we will never see those lows again.
A quote by Jeremy Siegel of Wharton School of Business in this MaketWatch piece published on March 9, 2020
Did he know? Of course not.
Neurologist turned investment adviser, William Bernstein says that the people who are good at something tend to be consumed by self-doubt, whereas the people who are incompetent are always supremely self-confident. Prof. Siegel, of course, is not in that camp but that is the usual reality.
And it makes sense. If you are not confident in whatever trade you are in and if you want to get better, you’d work at it. But you will never be done because the more you dig in, the more there will be things to learn and relearn. So, you keep on digging for more and you keep on getting better at it.
And hence it is no surprise that the very best doctors tend to be consumed by self-doubt. The real quacks, on the other hand, are always uber-confident.
It is the same with investing. If you think you have cracked the code, that is a dangerous sign.
But it is not just about cracking the code because if you’ve got the process right that is grounded in the fundamentals of investment finance and a knack to continuously adapt and learn, you’d have the conviction to stick through whatever the markets throw at you.
And that is what will ultimately count.
Thank you for your time.
Cover image credit – Brett Sayles, Pexels