Fear – A Great Sell Motivator, But Frequently Misleading

Fear – A Great Sell Leader, But Frequently Misleading 

The most recent fear to visit the investment community is the Coronavirus. Unless you are living under a cactus in a remote desert, this is not news to you. This infection first appeared in December, and by the end of January hundreds of people across several countries had become infected. This illness is believed to have started in a seafood market in Wuhan, a Chinese city of 11 million. About a month ago, the government in China decided to lock down this city to moderate the spread. However, according the NY Times, the malady has now been found in Australia, Europe, the Middle East, Canada, and the US.

The apprehension for the stock market, is that a widespread and not readily treatable disease will effectively slow world commerce and hinder the business of numerous companies. As an alarm like this gather’s momentum, it affects markets around the world. Beginning Monday, February 24th, we started a drop which, by the end of Thursday, the 27th, had seen the S&P 500 fall by over 13%. European markets have fallen around the same percentage, but that is of little consolation. Interestingly, the China, Hong Kong, and India markets, after suffering losses in January, are all showing declines of less than 3.5% for the month of February.

It is not unusual for the stock market to have a pullback of between 10 and 20 percent every year and a half to two years. It is our experience that in bull markets, these drops are frequently sharp, fast, and unexpected.

The bad news that causes the market to suddenly drop always takes a little different form, but the results are essentially the same. The ominous headlines create that most harmful and ultimately destructive of sentiments: ‘This time it’s different!’  We conjure up visions of our stocks plummet ing almost to zero and forget our long-term goals. Poor investors let their emotions guide them and react in fear to short-term negative events.

Our managed accounts have seen some excellent appreciation over the last several months, so the question arises, verbal or not, ‘Why don’t I just get out and then buy back near the bottom?’ On this, we speak from experience: Successfully selling and then buying back is one of the most difficult feats to accomplish, and almost no one is successful in doing this. It is virtually impossible to buy at the bottom, because one must do it when pessimism is at the highest, and that is more than challenging. Also, there is the tax angle to consider.

The important thing is to remember why we invested in the first place. Our goal is to seek to improve our financial circumstances over the long run. We are not buying ‘the stock market’. We are purchasing individual companies, which have been demonstrating excellent growth or the strong promise of future development. It takes time for businesses to develop! Amazon did not grow from a simple on-line bookseller to the giant it has become in two weeks or two years, but in the last 15 years the stock has risen from 30 dollars a share to over 2,000. One of the stocks in our growth portfolios, Epam Systems Inc, has grown from under 24 dollars a share to more than 223 in under 7 years. Both these stocks experienced several sharp pullbacks along the way, but over time earnings, sales, and cash flow continued to grow.

Historically, these exogenous events that cause major turmoil and fear are temporary shocks to markets that do pass. Typically, after the fears settle down, stocks should resume a rise, albeit with some trepidation. We continue to believe markets are in a secular bull market and will remain committed to positioning your portfolio for future long-term growth.

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