"Is now a good time to be investing?" seems to be the question on many minds right now. That's not surprising given how fast this market sell-off has occurred. It has been the fastest bear market ever witnessed. In only a matter of 18 days of trading the S&P 500 dropped a total of 29.5%! To put this into perspective, the next fastest bear market with losses in the 30% range occurred in 1933 and played out over the course of 3 months. The speed of which this bear market has occurred is simply unprecedented.
First and foremost, if you're thinking of investing money into stocks, you should always approach this decision with the mindset that this money is for the long term (5+ years at least). Despite what media headlines lead to you believe, no one knows what markets will do in 1 month, or 3 months, or even a year from now. In the short-term, markets are driven mostly by investor psychology and sentiment, which can change quickly and without warning. There is a very real possibility that money being put to work today has a good chance of being lower in value tomorrow. The fact that your investment may go lower in the short term shouldn't worry you. Obviously, it's nice if things go up in value initially, but the fact is, how your investment performs right after you purchase it, has VERY little impact on how well the investment will do for you over the next 5 or 10 years.
A study by James Montier that was presented in his book Value Investing, looked at stock returns over long periods of time, and found that only 10% of the total return of a stock comes from what occurs with its price in the first 3 years of owning it. The next five years are more important as they contribute 15% to the total returns experienced by the investor. However, it's past this point that is the most crucial. Holding for 8 years and beyond is responsible for a whopping 75% of the total investment return the investor will experience.
We may not know what stocks will do tomorrow, but we do KNOW that TODAY there are wonderful businesses with strong balance sheets, good cash flow, excellent management, and durable competitive advantages that are selling at values much less than what the businesses are truly worth. Yes – I expect most businesses out there to have a bad quarter, or several bad quarters of poor performance given the circumstances. I also expect that many businesses will resume normal operations sometime in the not to distant future and will continue to earn excellent profits over many years to come. I like to say, "Apple will likely still be selling A LOT of iPhones 5 years from now."
History has proven time and time again; the best investments are almost always made when the clouds are the darkest. It's the point when no one wants to own a stock (which is a piece of a business), and every person becomes a seller when the best opportunities present themselves. When this occurs, prices plummet regardless of the businesses ability to generate long term profits. You can decide to wait, which is fine. You might be right, which will save you a little money. But if you have a long-term perspective, you are much more likely to be wrong. This would mean missing out on the best opportunity to buy stocks in the past 11 years.
Trying to time the bottom doesn't work. When you're at the bottom it usually doesn't feel like you're there anyways. We like the prices we're seeing today, but we're also realistic that we don't know when we'll see the worst of the Covid-19 virus and its impacts on the economy. We'd rather not miss opportunities that we KNOW we have today, but at the same time we want some dry powder over the next several months in case we see even better deals in the future.
With clients, we're typically recommending a systematic wave of purchasing (dollar cost averaging) to remove the emotions and hesitation. We take an amount and spread the investment out over several months.
So back to the question, "Is now a good time to invest?" The answer is yes, but with one caveat; any money you're putting to work today, you have to be willing to see it go down in value tomorrow, or a month from now, or even three months from now. Otherwise don't do it. If markets drop in value, that's alright. We saw that 75% of our returns are going to come from what the company does AFTER we've already owned it for 8 years.
NO ONE knows what the markets are going to throw at us over the next year. We never know. What we do know, is good businesses have gone on sale and good businesses have a lot longer time frame than 1 month or even 1 year to earn profits. For those who are putting money to work, or are rebalancing portfolios into opportunities, history is on your side and will likely reward you more than your peers.
- Brandt Butt, Investment Advisor, CIM
Brandt Butt is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered. Montier, James. Value Investing (p. 331). Wiley. Kindle Edition.
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