I used to play this word game with my friends when I was a kid. It’s like “hangman”, but with a twist.
One player thinks of a word. A pile of chocolates equal to the number of letters in the word is then put in a pile. The other player must guess the word by suggesting letters of the alphabet….
…. a piece of chocolate is removed with every wrong guess. A player can also ask for hints in the form of letters….
No free lunch
…. But with every hint, two pieces of chocolate instead of one are removed from the pile. There are no free lunches!
The round ends when the word has been guessed correctly or when there are no more chocolates left in the pile. The winner gets to claim the chocolates remaining in the pile.
I call the game: “Pay more to know more”.
Something similar is going on in the market right now. The outbreak of the Covid-19 corona virus has sent global stock markets into a tailspin. The uncertainty has scared investors witless….
…. I can smell the fear. I expect the sale of brown trousers to soar, soon.
Wait and see
Thing is, investors want to know more about the epidemic before they buy shares. And they don’t mind paying more to know more. In other words, they want to wait and see.
Consequently, less experienced traders and investors have got out whilst they can. That has caused a sell-off that has turned into a rout. The rout has turned into a correction, and the correction could end up as a full-blown crash, if the selling continues.
Problem is, we have been conditioned to buy on the dips. No prizes for guessing who is responsible. His name starts with the letter “T” and ends with the letter “p”….
…. By the way, you just lost four pieces of chocolate.
The edge of an abyss
But this time, the dip has turned into a dent. And the dent has turned into a chasm. We could be standing on the edge of a stock-market abyss….
…. one misstep, one ill-chosen word, one exaggeration, and the whole house of cards – or should that be White House PR spin built on a pack of lies – could tumble.
The market wants the truth. But it might be satisfied with a cut in central bank interest rates. Exactly what good that would do is beyond me.
Is the Fed, the ECB, the PBoC, the BoE or the BoJ going to magic a miracle cure with their cheap money? Will they be able to fix global supply chains with more helicopter cash?
The market doesn’t need a rate cut. It needs a vaccine.
A blowout meal
Will cheaper money suddenly encourage fearful consumers to go out for a meal? Can you imagine a husband saying to this wife: “Honey, the banks just cut interest rates – let’s go out tonight and have sushi?”
That isn’t going to happen.
But we will get tired of hearing about the corona virus. And despite the World Health Organisation praising China for its actions, Mr. Xi could have acted much faster instead of being fixated with face-saving, short-term economic growth at the expense of people’s health….
…. And Mr Trump can stop peddling mistruths about this being a hoax. It is not a hoax. People’s lives are at risk. They have a right to know the facts.
It could take a while….
The upshot is that the global economy will recover. It could take a while. But that “a while” could pale in comparison to our investing horizon. It does for me, and I am over 60.
So, waiting for more information could be the wrong strategy. When more information about the coronavirus is available, the prices of the shares that you wanted to buy would rise….
…. that is the price we must pay if we want to know more. But what more do we need to know?
Yes, the Covid-19 coronavirus is novel. But there is nothing novel about stock-market corrections. All that we need to know is that stock prices will very likely be higher in 10 years’ time.
And as a dividend investor, I am focussed on buying income. I buy less when prices are high. I buy more when prices are lower. But I will always buy income for tomorrow with the money I have today….
…. that is called investing. Guessing when the stock market will bottom is speculating.
At The Smart Investor, we don’t speculate either. We invest. For the long term.
We’ll continue to invest and share with you the shares we choose to buy, how much we are buying, and when we will buy.
Stay tuned…
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