The 1 Year (Bear) Anniversary

Amar Pandit , CFA , CFP

It has been slightly over a year now since COVID-19 created havoc in the lives of people and the way we live, work and play. I distinctly remember March 2020 but do not feel it anymore. The feelings that I had as we were going through last year were different than the feelings we have now. Our current feelings are always connected with what is happening around us now whereas our future feelings will be connected with our future “NOWs”. You might be wondering where I am going with this. Trust me, I have some meaningful thoughts to share.

So, what was happening last year in the media and the noise around us? I hope to share some paper cuttings with you but the basic point that was being made was this – the world is coming to an end, so sell everything and go to cash and gold.

There were all these stupid headlines such as “Trillions lost in Sensex Crash; The richest person lost so much in one day”. The stupidest and cunningest (I know it is not a word but just felt like writing it) folks were all making proclamations and predictions about the end of the world. Most of this was financial porn to catch our “Attention”. This fear mongering indeed led many to interrupt their compounding cycles and retreat into perceived safety of cash or gold.

I had written a post “Embrace the Bear” on March 13th, 2020 and another one “Embrace the Bear – Part 2” on March 23rd, 2020. It is refreshing to read them again.

I am not at all making the claim that I knew that the markets would be where they are today. No one can and no one will. However, there was a thoughtful strategy crafted out for such events well in advance. Real Professionals are not surprised by such events; in fact, they are prepared for it.

The strategy was not about looking at Headlines and reacting; the strategy was all about being calm, being goal focused and planning driven and making wise choices. It will be useful for you to reread them again.

Fast Forward 2021.

Where are we now?

Gold is down from its March 2020 high, yet some gold bugs want to get into Gold. Gold seems like a safe and great story in times of fear but look at how this story has played out last year and over the last 10 years too.

Bond Yields are inching upwards now, and this was actually causing some panic in the market a couple of days ago, but they are still low. Needless to say, the US Federal Reserve has vowed to keep interest rates close to zero for as long as it takes till employment reaches a respectable level.

A point to consider for most is lifestyle inflation. This lifestyle inflation is the enemy of everyone including the affluent and wealthy. Bonds are certainly not an effective hedge, and neither is gold any hedge against lifestyle inflation (More on this in a future post).

Cash when used thoughtfully and purposefully can help you to be AntiFragile (Read this post. I know you will love it; Apologies for the multiple links in this post but I thought they were all relevant and necessary) but most are not able to use this judiciously.

The stock markets took a complete U-Turn and breached every imaginable number on the upside. People who believed in the headlines and market events as their strategy are still out of the markets.

Many are questioning why the markets are up and waiting for a correction. At the risk of sounding repetitive, remember that the markets can correct anytime and in any year by at least 15%. Every 3-4 years they can crack 30% plus and every 7-10 years by 50% plus. There is nothing new about this. Thus, it is wise and important to plan your investment journey with your different destinations at different points of time well in advance.

The Signals/Thoughts at that point of time in March 2020.

  1. Prices have corrected by 35% or so and thus they are cheap.
  2. Even if the next 4 quarters deliver 0 earnings, the value of a stock technically should not be down by more than 8-9%. The value of a stock is not depending on the earnings of the next 4 quarters but depends on the discounted cash flows of the next so many years plus there is something called as a terminal value. Did earnings go to zero in most sectors? No. Like always companies tightening, lowered costs and many had bumper profits in fact. I am not getting into a sectoral analysis here, but the point simply was that earnings of most companies were not going to zero (despite several sectors being hit).
  3. When a crisis like this happens, bonds are likely to be in trouble whereas stocks having corrected quite a bit represented value (if you could bear the volatility).
  4. Governments worldwide were not going to sit with their hands tight and rightly, so we witnessed massive fiscal and monetary stimulus worldwide.
  5. Interest Rates were going even lower. In fact, at one point of time, US S&P 500 (stock market index of the Top 500 companies) dividend yield was at 1.75% and the 10-year US Treasury was at 0.6%. I won’t get too technical here, but I believe you get the point here that Dividends from Stocks were almost 3 times the 10-Year Treasury Bonds.

I can go on and on but the key point to understand is that the world will not end like this. Human ingenuity will not only see us through but will bring tremendous progress (something that most are unable to witness in a cloud of negative news). There will always be light even when it seems impossible. Optimism is thus a real friend of an investor during such times beyond the wise counsel of a real financial professional.

What are the Headlines now?

The headlines today will again tell you all the things that are wrong with this world. The headlines drive people towards pessimism and causes difficulty to differentiate between bullshit and wisdom.

If there is any diet that you must take, a headline diet seems like a complete no-brainer to me.

There might be such events even in the future. What will you do then?

React to Headlines or make wise informed choices.

Like always, the choice is yours. You have the Freedom and Power to decide your Financial Destiny.

A wonderful quote comes to mind (do not know who to attribute it to) – Life is the most difficult exam. Most people fail trying to copy others, not realizing that everyone has a different question paper. Likewise, “Your Financial Life” is a Difficult Exam too. Remember, others have a different question paper.