It takes a bad day to know how a good day goes.
Since the beginning of the year, the portfolios I manage started climbing again. The bull market raged on. Dividends increased. Payouts came in.
It was time to plan some renovations. Buy a new car.
Then the coronavirus (COVID-19) hit.
It wasn’t too bad at first. A dip. The realisation that deaths — compared to the common flu — were miniscule. And the markets stomped up again.
Then it changed on a dime. Cases began emerging in Europe. Containment measures started to suggest a pandemic.
Coronavirus threat in Venice. Source: Radio NZ / Andrea Pattaro / AFP.
The nightmare of day-after-day blood losses on the world’s stock exchanges became a reality. Throwing up some hard questions that a portfolio manager must think about deeply.
Is the market fear worse than the reality?
If it is — and it often is — then now is the time to buy.
COVID-19 is being compared to SARS. Both are ‘coronaviruses’ and linked to Chinese wet markets where animal disease spreads to humans. COVID-19 shares 80% of its genome with the SARS virus.
SARS killed 774 people and infected 8,098 over an eight-month period, from November 2002 to July 2003.
COVID-19 has killed more than three times that many in eight weeks.
In 2002, China represented only 8.7% of world GDP. Today it is nearly 20%.
In November 2002, the S&P 500 Index sat in a low point of around 900. In 2020, it sits at a high point of around 3,300.
While SARS had minimal impact on the markets, COVID-19 is already responsible for billions in losses.
The last time we saw an epidemic have such a toxic effect on wealth was the HIV/AIDS epidemic in 1981. The S&P lost 16.5% of its value over 12 months.
In this case, the fear is real. Countries are closing borders. Containment will disrupt travel and supply chains. The markets are very high.
When you’re already dizzy, it doesn’t take much of a punch to knock you over.
Is it time to buy?
In an ideal world, you’d buy at the bottom. A vaccine to COVID-19 will appear thereafter. Cases will end. And in a low interest-rate world, investors will again realise they need return and yield.
The market will jump. You could make loads of money.
The trouble is we don’t know where the bottom is. We might have reached it already. Actual death numbers are small. Containment efforts seem to be working.
Unless borders remain closed, supply chains remain disrupted, people continue to die — then the heat melting the market could soon come off.
My own strategy is to buy dips when I see obvious value in favoured stocks. Sometimes I’ll run low-level limit orders just to see how deep they’ll fall.
Of course, I may be wrong. A still bigger dip may be yet to come. But if you’ve been watching a business for a long time — if you understand what they own and how they earn — then you can make a judgment call on this. One you’re happy to live with.
Market crashes can wipe out wealth
Now, we come to the main reason many people do not invest in stocks. And the reason for the question: ‘Are stocks just too risky?’
When you buy shares in businesses, you’re buying into the fortunes of that company. And the confidence of the wider market in which they’re listed. So, when a world event like the coronavirus threatens the bookings and sales of these companies, their outlook can take a turn for the worse.
When stock prices fall, shareholder wealth falls with them. When companies have to cut dividends to retain profits during tough times, shareholder income gets sliced.
Changes in market behaviour can also be sudden due to the liquidity of most stocks.
If you knew Rangitoto was going to erupt and destroy much of Auckland Harbour next year, you might try to sell your house now. This is how many fund investors operate — selling immediately to avoid perceived future threats.
Threats are not reality. And this fear gap can create opportunity.
But that’s not the main reason I invest in stocks. I continue to invest for one main reason.
It’s the same reason I take the ferry to our office just across the water in Auckland City. I could drive, but I’d get stuck for the good part of an hour in motorway traffic. I could also take the bus, but then the trip would also take longer than the boat.
The boat is not ideal. You queue. It’s not cheap for a 10-minute journey. Sometimes there are delays. It can get crowded.
But it’s the best way to get from Devonport to Auckland.
The benefits of investing in the stock market
Stocks also provide the best way to give me some dividend income with the prospect of capital growth.
I could leave my money in term deposits at around 2.80% per annum. But I would struggle to even keep up with rising prices.
I could buy another rental property. But I’ve been there. Done that. My previous rental yielded about 2%. Barely worth the stressful management. Constant maintenance. And tenancy troubles.
Perhaps a commercial property? There’s more upside here with the tenant paying the outgoings. Maybe I can get 5%?
But commercial property at the cheaper end can be tightly held. And there may be significant vacancy risk. Unless you can mitigate that with a very well-located opportunity.
Anyway, I can enter commercial property around the world through stock-exchange listed REITs.
Let me give you an example.
Over the past few years, Property for Industry [NZX:PFI] and APN Industria REIT [ASX:ADI] have provided dividends of around 5%. And they have grown in value — in the case of PFI, some 30% over 12 months.
So, for the income and upside I get from some well-chosen stocks, well, they’re probably like the ferry. My best option to get where I want to go.
Head along to one of the property seminars currently doing the rounds. They might tell you that investment opportunity with property involves using leverage.
Borrowing to get a bigger asset. And potentially achieving better returns.
Any sort of leverage increases your risk profile. And it comes with a cost against your yield.
What a lot of people don’t realise is that you can leverage a quality stock portfolio too. Possibly at better margin rates than retail banks will offer you.
Many ‘get rich’ property schemes are really just ‘Wonderbras’. They leverage average opportunities and rely on the padding of capital growth in boondock areas.
This will only work if the demand v. supply disaster that makes up much of New Zealand’s property market continues.
And perhaps it will…
But there are also signs that migration is slowing. Supply is coming on stream. The government might take more action to address market failure.
The property market is very different to the stock market. It is more illiquid. There won’t be sudden sell-offs, but there will be gradual shifts.
These shifts can catch investors unaware. Hurt the leveraged. And take much longer to restore value, as opposed to the bear-bull cycle of stock markets.
Where the bull could usually run a bit longer.
PS: On the back of our successful Lifetime Wealth Investor programme, we now have a Portfolio Management option for Wholesale and Eligible Investors. If you’d like help to build and manage a share portfolio in your own account, please click here for more info and to check your eligibility.