The Covid-19 pandemic has rocked the world in 2020. The key financial markets have suffered substantial losses. Is this the beginning of a 21st century great depression… or a major opportunity to buy great stocks at low valuations?
The investing world has been speculating ever since the 2008 credit crisis and the global recession that followed, where the next ‘black swan’ event would come from to crash the market.
In early 2020, we got our answer.
A rapidly spreading and highly contagious virus sent the world and its many economies into Covid-19 panic.
That panic quickly moved into the financial markets.
In little over a month, the S&P 500 fell nearly 30%.
The NASDAQ plunged by a similar amount.
Markets around the world fell with them, placing the investing world suddenly and solidly into bear market territory.
Investopedia defines a bear market as:
“A condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.”
A bear market differs by definition from a ‘correction’.
The distinction being that this type of significant fall in asset prices represents a deep change in overall market sentiment.
In a bear market, fear reigns, not greed as with a bull market.
Investors tend to be eager to sell stocks they fear will fall further and hesitant to buy as they wait for the panic and uncertainty to play out in the market.
But if you’re a value investor — someone whose wealth building strategy hinges on buying assets below what you calculate to be their true worth — bear markets like this one don’t always mean doom and gloom.
See, value investors like to play the long game.
Let’s take a look at how the 2020 market crash could represent a big opportunity for long-term value investors.
Bear Markets Can Make Happy Hunting Grounds
Be greedy when others are fearful.
— Warren Buffet
According to The Motley Fool, every bear market in history has something in common.
Not the cause, or the amount the markets dropped…
No, every single bear market on record has delivered the same thing in the years that followed:
New stock market highs.
You will have heard the phrase ‘markets go up by the stairs and down by the elevator’.
When markets recover from panic periods like these, history shows they build higher and higher staircases. Every time.
Now if you’re a short-term investor who just bought a bunch of stocks last year, right now you’re going to be feeling a lot of pain.
Those stocks will have lost approximately a third of their value, let’s say.
But if you’re a long-term investor who can ride out this bear market, the records show that, given enough time, your stocks will recover and go on to hit new highs.
But the benefits of being a long-term value investor at a time like this don’t stop there.
Key to value investing is buying shares in good companies at prices below ‘fair value’.
There are various ways to calculate this of course, and each investor goes about that in their own manner.
But history also shows that during bear markets, the wider market sentiment drags perfectly good stocks down way lower than they deserve to be trading.
Patient value investors get a window of opportunity to swoop in and bag great bargains on shares that stand a decent chance of coming back strong when the recovery gets going.
How Value Investors Could Flip This Bear Market Into An Opportunity
There are a few things it might pay to take stock of right now as the market panic creates negativity and noise all around your decision making.
It’s important to keep in mind that when markets crash like this, almost every trading company tanks.
But that doesn’t mean every tanking company is a bad company.
Right now, airlines, for example might be getting hammered. Their business prospects beyond the Covid-19 pandemic look grim indeed.
But there are many other businesses that could bounce back strongly.
So one thing worth doing is analyzing which stocks you hold — or might invest in — that have good prospects of recovery over the next few years.
The patient and tactical value investor works out ways to thrive in conditions like these.
In 1973 and 1974, the markets plummeted nearly 50%.
The Washington Post Company was hit hard.
At the worst point, the company had a market cap of just $80 million.
But while most investors sold out of the falling stock, Warren Buffett said ‘buy’.
Buying shares at a deep discount, Buffett made a classic bear market value play.
The company recovered and went on to rise to more than 100 times what Buffett paid.
That would have turned a $10,000 investment into a cool $1 million.
See? Good stocks still trade in bad markets.
Another important thing to consider during this bear market is the holdings in your portfolio.
If you’re a long-term value investor, you bought those investments because you have a long-term thesis that their value will rise.
Records show bear markets are short-term events relative to the long-term progress of the stock market.
So, just because markets have plummeted in this pandemic, does that mean the stocks you hold that have lost value are suddenly bad investment?
This is worth considering before getting into any impulsive panic selling.
That is especially true of income stocks.
If you’re holding shares for a long time and collecting valuable dividends, you might cut off a good income stream by getting out of the stock in the fear it will fall lower.
Above all, as you manage your investments and look for opportunities during these tricky conditions…
Ensure You Track Any Stocks You Buy In This Market The Right Way
In order to understand what’s really going on with your portfolio, it might not be enough to use a spreadsheet or trust everything to your broker.
If you manage your own portfolio and you want clarity and confidence about how your investments are performing, it’s a good idea to use a modern digital portfolio tracking tool or application.
It allows users to monitor performance, portfolio contributions, index benchmarking, and generate both capital gain and income tax reports.
If you’re a long-term value investor looking to capitalize on the current bear market, make sure you use a platform that allows you to track and analyze your investments intelligently.
About the Author
This article comes to us from Thom Benny, Communication Director, Navexa. The opinions expressed do not constitute investment advice.