Sunday, March 15, 2020

Investing During A Crisis - Are you ready for this ride?

By now, most of us should have experienced both excitement and fear in one way or another. Fear due to the virus and the economic recession, excitement due to having the opportunity to invest at low prices but at the same time still having the fear that stock prices can go lower. This is what I have been preparing for all these years but still when this hits, its hard to stomach the situation at one go.

To be honest, since I started investing about 10 years ago, I've not seen such a wild ride in the stock market before. This is worse than the European debt crisis when many European countries faced the possibility of bankruptcy which I've experienced in 2015. There were -100 points drop back then but it didn't occur so many times in a week as what we experienced just recently.

Is this worse than the last Global Financial Crisis in 2008?

During the last global financial crisis back in 2008 which is known to us as GFC, I was still in army and didn't have the money to invest. In a way, I was sheltered from what was going on and the only news source which I had was from the Straits Times newspaper which was delivered to the army camp everyday. Back then, smart phones were not so common and were not allowed in army camps also. However, I later on learned about the GFC from my university economics course and know that it was essentially a collapse of the financial system due to high leverage debt of corporations and individuals and most importantly junk debt. Many banks such as Bank of America and Citibank and even insurance company AIC almost collapsed. Eventually, one famous bank, Lehman Brothers did collapsed and the rest is history.

Now, the crisis we are facing now was started due to the COVID-19 virus. This is different from what we experienced before such as SARS which was not so infectious. This time, the virus caused many cities to go into lock down such as China's Hubei province, some cities in South Korea and even Italy lock down their whole country. Singapore also restricted access for foreigners coming from China, South Korea, Iran and many other European countries. This affected tourism quite a lot at an unprecedented scale. Then, Russia and Saudi Arabia didn't manage to agreed on oil prices and this sent the oil price nose diving rapidly. Oil prices is important to countries whose economy depend on its export and many countries will go into recession because of this also. Singapore too will not be spared. Singapore's Prime Minister Lee also mentioned that this crisis may affect Singapore worse than the GFC in 2008. This was reported in Bloomberg news here.

Are you ready for this ride?

Those who have been preparing for this crisis and saving up money for investment will benefit from it. I have started buying some stocks last week as valuations reached attractive levels. Many of the REITS also fell sharply which presents an opportunity to buy some of them such as CDL Htrust, Suntec and also bank stocks such as OCBC. These stocks are all trading below book value now with dividend yield of more than 5-6%.

Do I think the stocks will drop more? Honestly nobody will know the answer and if we're just waiting to catch the lowest price, then we might just miss out when stocks begin to recover. Over the many years of investing, I learnt that it is never easy to catch the lowest and when price starts to go up, we will be hoping or thinking that it might go down again then we do not dare to invest at all until the bull market begins again. This is psychology at play which is quite common for all investors.

Keep calm and invest in companies with attractive valuations and strong balance sheet

I am now 60% invested with 40% war chest left to accumulate slowly. There are just too many stocks to buy with attractive valuations of trading below book value and low PE ratio but now its also about the companies having a strong balance sheet to ride out this crisis. We do not want to invest in a company with weak balance sheet and they end up collapsing. It can happen and it will happen.

Diversification is also important which I always believe in. Sometimes no matter how good we are in reading financial statements, things can still turn drastically bad for a company in a short time which we won't even have time to react. When a company we invested in collapses, we should still be doing well because we have diversified our portfolio into different stocks. Then again, its about managing risks so we can invest more into stable companies and allocate less to more risky companies in our portfolio.

STI has dropped almost to a 5 year low at 2634 now. This is near to the 2015-2016 prices which I bought some stocks during the European debt crisis at attractive valuations. This is part of the reason why I've started accumulating some stocks again.

If we extend the chart to 2002, we can see the drop during the GFC in 2008 was about 50% from the high. STI drop now is about 25% from the high. Will we see another 50% drop this time? Its anybody's guess now. The question we should ask ourselves is if it drops another 25%, are we still prepared for it?

My own thoughts is the drop may not be the end for now. If it drops more, I'll be happy to accumulate again. Psychologically, we all need to be prepared for more drops and stocks prices may stay depressed for a few months and maybe even more than a year. Nevertheless, if we have invested in good companies at great valuations, we will mostly be assured to ride this out and have good returns from the stock market. Are you ready for this ride?

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