It’s the classic investor’s dilemma.
The world is still mired in economic woes.
Yet, stock markets have been ebullient.
In the US, the Dow Jones Industrial Average (INDEXDJX: DJI) has continued to scale new all-time highs, and is up around 4.5% this year.
The technology-heavy NASDAQ Composite Index (INDEXNASDAQ: IXIC) is also hitting new all-time highs and is up a whopping 38% year to date!
In fact, both indices have shot up 62% and 83%, respectively, from the lows reached in March this year.
Even our local Straits Times Index (SGX: ^STI) has started to march up, chalking up gains of around 17% since early November.
In light of the recovery in the stock market, you may wonder whether you have already missed out on the rally of the decade?
Is it too late to invest now?
Don’t wait for (more) good news
There has been some good news released recently in the fight against the coronavirus.
Two or three pharmaceutical companies have announced positive Phase III results for a COVID-19 vaccine.
Countries around the world are mobilizing their logistics and transportation resources to secure ample supplies of these vaccines.
Markets have indeed risen due to this “feel good” factor as an end is finally in sight for this dreadful pandemic.
However, you might not want to wait for even more good news.
Share prices have indeed reacted to this first wave of good news, but some investors remain uncertain as to the trajectory for the recovery.
Most have already been desensitized against further bad news, with daily new highs in infection rates not triggering much of a panic or emotional response anymore.
In short, valuations seem to be at a fair level, with news of a possible recovery next year being factored in.
If a stronger recovery is confirmed, it could further lift valuations of depressed businesses.
A high price for a happy consensus
Warren Buffett once said you pay a very high price for a cheery consensus.
His statement basically means that if everyone agrees that things can only get better, then valuations and share prices will be very high as investors will factor in only good days ahead.
The converse is also true.
When the chips are down and people are feeling despondent, then valuations will remain low.
As far as possible, you should avoid buying stocks when everyone believes that nothing can go wrong.
With such a mentality, share prices generally price in a blue-sky scenario and ignore the associated risks.
Therefore, buying when there is pessimism enables you to obtain some semblance of a margin of safety.
Focus on the business
It’s important to also remember that your focus should be on owning a piece of a wonderful business.
Although there may have been a recovery in valuations in the last few months, as long as the business continues to grow in the future, it’s definitely worth considering taking a stake in it.
Your research and analysis may provide you with insight into how the business is going to perform over the next five years.
If the company makes for a great long-term investment, purchasing in stages is an option that should be considered.
You can start off with a small initial purchase and then look to add on to your position over time if the business continues to do well.
When the business does well, the stock price should also follow.
Get Smart: Opportunities abound, if you care to look
Remember that it’s almost impossible to catch markets at their extremes.
We won’t be able to recognise the point of maximum pessimism except in hindsight.
Although we can look back and recognise that March was the low achieved during the pandemic, it does not mean that it’s too late to invest now.
As investors, we should avoid anchoring bias.
Anchoring involves pegging your mind to the share price of businesses that hit a 52-week low, and thinking about how much more “expensive” they are now.
But this is the wrong way to think about investing.
When great businesses recover from crises, they will demonstrate much more potential to keep growing far into the future.
And it’s not too late to deploy your capital now even though you may have missed the bottom.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
