Currently there are predominantly two main camps.
Those who believe that the bottom of the market was reached on March 23rd, and those who believe that it is a bear trap – and there is plenty more pain to come.
The question is though, does it matter?
In short, the answer is most likely “no”.
This is because bottoms are only found out after it has well and truly passed, and buying on the downswing offers more upside than waiting for some nirvana “all-clear” signal.
Howard Marks explains this point very well in his recent memo lately:
“The old saying goes, “The perfect is the enemy of the good.” Likewise, waiting for the bottom can keep investors from making good purchases. The investor’s goal should be to make a large number of good buys, not just a few perfect ones. Think about your normal behaviour. Before every purchase, do you insist on being sure the thing in question will never be available lower? That is, that you’re buying at the bottom? I doubt it. You probably buy because you think you’re getting a good asset at an attractive price. Isn’t that enough? And I trust you sell because you think the selling price is adequate or more, not because you’re convinced the price can never go higher. To insist on buying only at bottoms and selling only at tops would be paralysing…”
At the end of his memo, he makes a profound statement:
“The bottom line for me is that I’m not at all troubled saying (a) markets may be considerably lower sometime in the coming months and (b) we’re buying today when we find good value. I don’t find these statements inconsistent”.
The speed of the market recovery in the past few weeks has certainly caught many of us offside.
So, have you missed the bottom?
Well, according to Marks – arguments can be made for yes and no.
The answer to that question is… no one knows, it’s impossible to know today.
We recently had reporting from a vast range of companies on Q1 numbers – some missed, some exceeded, but broadly speaking – many were in line with estimates.
What will really be telling is Q2 numbers. We won’t find out the real economic hit to companies, their revenues, earnings, profit margins etc. until July at the earliest.
The biggest unanswered (and overlooked by the mainstream) question is duration.
How long will the lockdowns last?
And a derivative of this statement.
How will the market react to companies that report no revenues for a month, for two months, for a quarter?
Investing is about managing risks, and placing bets based on outcomes of probabilities.
There’s always a trade-off, between the terms “risk-on” and “risk-off”. It is never easy.
If you go all-in thinking the market bottomed, in an attempt to participate in the recovery… and it goes wrong, then you lose.
If you go all-out thinking there is worse to come… and you’re wrong, then you also lose.
Survival in investing is the key – finding the right balance, one that you are comfortable (or as close to comfort) with the risks, is paramount.
We all know that there is no guarantee in investing.
About the closest thing we can guarantee on, is that when all of this blows over, and the skies clear again – everyone will wish they had more cash to invest, at a better time.
Remember, only one person buys at the bottom, and its corollary, only one person sells at the top.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
