“These days people know the price of everything and the value of nothing.” Oscar Wilde, The Picture of Dorian Gray
You’ve seen the headlines, visited empty grocery stores and maybe even earned an unexpected “spring break” to practice social distancing. What do you think about it? Is this the end of the world as we know it?
Right now you and I are living through a visceral, emotional overreaction to a real health problem. We need strong leaders to keep people safe and to limit hysterical nonsense. With few exceptions though our leaders stopped leading and began following about the time the first rude twitter rant showed up in their social media feed. Elected leaders seek the voting public's approval so the squeaky "tweet" gets the grease regardless of whether it's a reasoned complaint or not. It's not just politicians. We live around many people who have accustomed themselves to reacting to others more than being introspective, patient and proactive.
Let’s cut through some of the noise and think independently. The societal consequence of followership is extreme behavior. Hoarding toilet paper is a symptom but the problem existed before the flu outbreak. We are allowing opinions from uninformed sources to invade our minds and influence decisions. Allowing Pinterest posts from strangers dictate room decorations or wall paint colors is fine. Following the herd into financially ruinous decisions is in a different class of dysfunction. Value your attention and focus for the life-changing resources that they are. Don't rent the space between your ears so cheaply.
Here is a favorite trading aphorism for times like this, “Buy when there’s blood in the streets. Even if it’s your own.” Some attribute this to Barron Rothschild in the 18th century, others say Rockefeller. The sentiment is direct – going against the crowd is sometimes necessary and often times rewarding. Mathematically, if you follow consensus you can never do better than the consensus outcome. Worse still, group-think may lead you into unwanted extreme outcomes.
Contrarian thinking is hard. Contrarian ACTION is nearly impossible. So far in 2020, it would have dictated selling stocks in winter near all-time highs when valuations were unreasonably expensive. That is easy to see in hindsight but behaviorally difficult to actually do it in real time.
Right now the contrarian move is to put money to work in any one of several depressed asset classes (energy, small caps, high yield bonds to single a few out). Doing so requires the tacit acknowledgement that prices may go lower after you buy (maybe even the next day). It's almost self-evident that buying an asset class after a 20% to 30% decline is prudent, yet how hard it is to push the buy button and commit capital while things are uncertain? Warren Buffett mastered this exercise. Learn from him and be proportional with your changes. If there are no worries in the market there aren't many cheap deals. Remember this: short term fear foments long term opportunities.
Where do you find the money to do this? Conventional thinking processes declines in the assets you already own and says, “it’s down too much to sell now.” But odds are good that you have some investment that may be down but not as much as other asset classes. Risk declines when prices drop so consider a switch out of one position into a riskier one if the new invest has experienced a bigger decline. You probably won’t have to look hard right now.
Use similar ETF products to do a tax loss swap from one product to another (like one stock index fund for another based on the same index). This allows you to book a potentially deductible tax loss now but allows you to stay invested in the same market sector and avoid “wash sale” rules.
Find the free money. Some exchange traded investments are trading at discount prices. This means you can buy that investment for LESS than what it is actually worth. Patient investors learn that discounts can narrow over longer time frames. If they do, that's free money.
Do you participate in your company sponsored retirement plan? Increase or even front load your 401k contributions this year. Now is a great time to get more of your company’s free money in the form of a retirement plan match. If you have the savings and financial flexibility, temporarily dump more of your paycheck into the company plan and live from savings for a few months. This is an advanced strategy for disciplined savers to redirect cash into a tax deferred vehicle now while prices are depressed instead of waiting until you get paid throughout the year and prices have potentially bounced back.
We are all facing the same challenges. The choices you make dictate the financial consequences you will reap. I’ll leave you with this nugget of investing wisdom from legendary value investor Shelby Davis, “You make most of your money in a bear market: you just don’t realize it at the time.”