FIVE LESSONS THE PANDEMIC HAS TAUGHT INVESTORS
Savvy ones who took advantage of panic saw handsome rewards, Peter Hodson says.
Capital Group portfolio manager Steve Watson recently reflected on the 2020 market decline and subsequent full recovery in a recent investment article for clients. They were so insightful that, with his permission, we will highlight some of the key quotes he made in 5 Investment Lessons From The Pandemic, as well as provide our own additional thoughts and, hopefully, some stock ideas. Let's take a look.
1) Market disturbances are a fact of life for investors
“While no one could have predicted the pandemic, it would have been wise to consider the chance that something would come and disrupt the bull market of the last decade.”
There is always a crisis around the corner, whether it be a virus, a recession or something else. Experienced investors recognize this, and don't panic. After all, with markets setting records, every single crisis so far has been a good buying opportunity. Smart investors also know that most market crises are shortlived. The pandemic has certainly proven that, with a 100-percent bounce in the S&P 500 from March 2020's lows — that is, in less than 18 months.
2) Interpreting history isn't an exact science
“History does not necessarily repeat itself in ways you expect; drawing conclusions about COVID from SARS proved to be a mistake, leaving investors unprepared for the extent and duration of this pandemic.”
Investors also misread central banker's actions, expecting them to watch and monitor developments, as they did in 2008. Instead, central banks quickly threw money at everything and asset prices across the board surged. But history can help, as well. The VIX volatility index surged in March 2020 to a record, suggesting “blood in the streets,” as it has at other similar market events. Investors who took advantage of this panic and bought were very handsomely rewarded.
3) Growth or value? Both, at the right entry point
“Purchase shares when they are down, but hang on long enough to let the market catch up with the true value of the company in question.”
If the past year has taught us anything, it is not to switch back and forth between value and growth stocks.
We have seen six shifts from value to growth, or back again. Investors who tried to second-guess the market often ended up on the wrong side of this shift.
A mix of stocks is better. Maybe own some Fairfax Financial Holdings Ltd. stock alongside your high-flyers such as Lightspeed Commerce Inc. That way you always have something working in the market.
4) Dividends help pay the rent
“Dividends may serve less of a stabilizing factor than previously thought, though yield is still beneficial — the value of the dividend as a wealth-transfer mechanism linking companies and investors remains important.”
Yes, there were hundreds of dividend cuts and omissions last year. Still, many investors' budgets were saved by owning stable firms that did not need to cut dividends, including BCE Inc., Telus Corp., Thomson Reuters Corp. and SunLife Financial Inc.
5) Dr. Copper delivers a healthy diagnosis
“Copper has a keen ability to help predict the path of the global economy; while prices bottomed out in late March, they are now suggesting that the economy is mounting a strong recovery, while also warning about mounting inflationary pressures.”
In the middle of the pandemic, of course, few expected oil and metals to show a big rally — after all, the world was ending. But the metals sector and energy sector in particular have staged big rallies. Again, diversification helped savvy investors, those who know that cycles come and go.
Peter Hodson, CFA, is founder and head of research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also associate portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)