Levitation is not a long term investment strategy
In the first quarter of 2020, when the coronavirus reached our shores, it caused a dramatic crash. The markets have lost 38% of their value in three weeks. The Federal Reserve decided to back all possible asset classes with $ 120 billion in cash injections each month to bolster our economy as it entered a total shutdown. This pumping of money continued uninterrupted for 21 months, inflating the prices of stocks, houses, cars, lumber, toys, furniture and just about anything you want to buy. Yes, there are other factors involved like President Trump’s $ 2 billion bailout bill. It just added more excess money to the system.
Couple all that excess cash with adopting TINA (There is no alternative) to own stocks when bond portfolios are not earning anything. Stock prices have been pushed to insane valuation levels that make no sense. This is what we are correcting now. Markets are also fearful as all that pumped money will be reduced to zero by April.
The stock market has become an incredible entertainment for many locked inside. Initially, people bought companies like Zoom (589 now 198), ROKU (491 now 228), Amazon (3,773 now 3,341) and Peloton (171 now 38) which would benefit from looking after and working at the home before vaccines are available. and he was sure to get out. Now a lot of them are crashing to earth. What you pay for a stock really matters, especially if you want to buy low and sell high.
There are long established investment rules that really work for making money. Don’t be a dynamic investor, chasing the stain on the Dalmatian’s tail in front of you. That’s what the Reddit / Robinhood mob was doing. Never pay 100 times the losses for anything. Pick stocks that are no longer in vogue and are not valued at great prices. You better be in front and not behind the crowd. So be patient.
Advanced Micro Devices was just such a stock at 11 over four years ago. The company was on the verge of bankruptcy before Lisa Su came in as the new CEO to try to fix the mess. What was especially delicious was that no one believed she could. AMD traded between 10 and 15 months until it started to gain respect. When income and income became reality, the multiple that people would pay for that income also increased. This made it a “double whammy” stock combining earnings growth with multiple P / E expansion.
Now consider Ford (which we own). Ford was the only American automaker not to agree to a bailout to avoid bankruptcy during the Great Recession, as GM and Chrysler did. Even so, he got no respect in 2020 and traded in single digits. Today, Ford is a company in rapid transition to be an electric vehicle player that really knows how to make cars and trucks. In volume. It markets a new electric delivery van, its Ford 150 Lightning truck and the Mustang Mach E, all developed over several years but announced this year. Suddenly, with a new CEO savvy in PR, everyone loves Ford. Profit estimates increase and P / E increases. Another stock double whammy. Here’s the real shock: Ford is up 120% this year compared to Tesla’s 28% gain.
Always remember that when the markets get tough investors want profits. They want balance sheets. They love dividends. Vaporware can only take you so far. Beware of businesses with no income for years to come. They may never come. Actions never levitate forever. When the slowdown arrives, as always, just like Icarus when he flew too close to the sun, you too will crash into earth.
Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment advisor, in 1986. Email her at [email protected] Follow her on twitter: @joanlappin. Its previous columns appear at heraldtribune.com/business/columns.
This article originally appeared on the Sarasota Herald-Tribune: JOAN LAPPIN: When Markets Get Tough, Investors Want Profits