Warren’s advice could not have been more relevant in 2020. Think back to March and April of 2020.
If your investing thought process was anything like mine at some point from February to April you probably went from.
Well this is a particularly bad pandemic, but we will get through this after this brief shutdown… to… oh crap will the economy be closed for months? Years? Will it ever open again? Is the stock market going to collapse? What about bonds? Real Estate? Should I be selling everything and buying gold? Bitcoin?
Somehow, I resisted the urge to sell everything. In fact, I sold nothing. I did nothing at all in fact. Keep in mind I was making this decision after the S&P had already collapsed by about a third within the span of about three weeks.
Don’t try to time the market
Some people might think that if you can sell before the collapse, and then buy back in at the bottom then you can make a killing.
I personally know that would take someone a lot smarter than me. That would take two fantastically well timed decisions. One, you would have to be able to recognize a greater dip, then the one that has already occurred is coming.
Maybe you can argue, you looked at the science and just knew that this was going to lead to an epic economic collapse and so sold in February. After all some people I am sure did just that.
But then the S&P bounced back fully by around June. And about a third of that came within days of the first collapse, then another third within another week, before gradually everything returned over the course of May and June.
So, the next decision you would have had to make was to buy back in, three weeks later, when the S&P was at the bottom. The same person selling in February, was simply not making the decision to buy back in, in late March.
So, the chances you could take advantage of this type of crash by selling before and buying back in at the bottom is slim to none. Pure luck perhaps. But by being smart and analyzing the situation properly? Nope.
But you can get a half-win sometimes
Pay attention to the market and sometimes when either the world seems hopeless, your 401K is all of the sudden half of what it was a few weeks ago and you’re worried you’ll have to work until your 80?
Well, if you can overcome your fear at seeing everything you have plummeting. And follow Warren’s advice, and perhaps pick up some shares when the world looks it’s bleakest. Well that is when you can make a little money.
The influx of the RobinHood investor
A lot has been written about the influx of new retail investors this year. Particularly millennials. Particularly those investing in the “story” stocks. Particularly these retail investors who always buy and never seem to sell.
Those same investors, if you remember were buying airline and cruise stocks in April and May of 2020. I remember the money market channels such as CNBC and Bloomberg calling those people crazy.
I think they were just following Warren’s advice. Just at the point when everyone was most fearful and thought, perhaps we’ll never travel again. Well, that seemed like the best time to buy.
Where are we now?
What about the other half of Warren’s quote? Should we be selling now? Are people too greedy now?
I think we are close, but probably have a bit further to go before the greed is at a peak.
The market hasn’t been skyrocketing the last few months. It’s been pretty steadily increasing but nobody can argue the last few months have been irrational exuberance. It seems to me that individuals are making rational decisions thinking perhaps this is the last bad winter of the crisis… thinking, I’m hearing a lot of good news about vaccines… perhaps the death rate isn’t as bad as we’ve been hearing through most of 2020… perhaps the economy will return to some semblance of normal in 2020… and perhaps their will be pent up demand…
Just when things were at their bleakest in 2020. That was the time to act. Not sure if I’ll have the guts to take action next time. But I’m going to try to remember the spring of 2020 next time the world is on fire.