28 March 2024
1300 794 893
AP Photo/Mark Lennihan, File

Stocks slump. What the f##k is going on?

Peter Switzer
12 June 2020

With the most-reported stock market index i.e. the Dow Jones Industrial Average down 1,861 points overnight, the biggest one-day fall since March when the Coronavirus crash came to town, I want to say: “Don’t panic!”

And you don’t need to say “what the f#!k!” because what’s happening has happened before. The only difference is that the cause for the concerns is different.

Regular readers might recall on Wednesday the headline to my story was: The stock market is on fire but be careful, you could get burnt…”

That story concluded this way: “But be aware that a lot of smart fund managers, including great investors like Warren Buffett, look like they’ve been outplayed by amateur stock players who have bought into this great rally, while they’ve held cash,”.

I then wrote. “My advice is that if you’ve bought in and gained and don’t want to sell your shares, make sure that they’re companies that will be good long-term performers. That means if a surprise big sell off happens, you can buy more of these great companies, that in the fullness of time will justify your financial commitment to them.”

That’s precisely how I’ll play this sell off but there’s bound to be a time when the pessimists and sellers will outnumber optimists and buyers. But there will be a turning point. And that’s when I’m going to buy the kinds of big rebounders we’ve seen in recent weeks.

I buy for the future and have been driven by what I’ve learnt from the likes of Warren Buffett, to buy quality companies where I like the management, the company story going forward and when the price is low because the market is spooked.

Warren is famous for his: “Be greedy when others are fearful and fearful when others are greedy.”

And I want to become famous for advising: “Buy quality companies when the market is down and buy for the long term.”

IOZ tracking the S&P/ASX 200

The exchange traded fund IOZ tracks the top 200 Aussie companies on the stock market, so it’s driven by 200 quality companies. And since March 23, the low point of the crash, it’s up 30%. Plus if you hold it for a year, you will get about 3-4% in dividends, which is like a nice annual gift for having faith in Australian businesses.

The unit price of IOZ, which is $24.39, will fall today and I think we will have a few days of negativity. And for the long-term investor who can’t pick individual companies, IOZ and its rivals are things to buy.

By the way, this isn’t advice but it’s pretty good financial education.

But why will the stock market more than likely sell off today?

Here are the reasons:

• The US is seeing some second wave infections in places like Texas and California.

• The US central bank boss wasn’t excessively positive about the immediate future of the US economy, though he did say that it will contract by 6.5% this year but grow by 5% next year.

• But more importantly, the stock market was ahead of itself, especially in the US. Early this week, I pointed out that the S&P 500 Index was only 5.5% off its pre-crash highs! That was crazy positivity that even made me pessimistic!

Our market had come back so we were 16% off our pre-crash highs, which was a little over-the-top but not as crazy as those excessively positive Yanks.

Markets overreact in both directions. And computer trading and the role of AI and all those modern hi-tech things that have invaded our life explain why we see huge sell offs and buy ins.

Two weeks ago, I nominated four stocks that could be the hi-tech stocks of the future and that might be the WAAAX stocks of the future.

WAAAX stocks are Wisetech, Afterpay, Appen, Altium and Xero and these stocks have killed them in recent years. I nicknamed my stocks to watch the ZEET stocks. This was made up of Zip Co, ELMO, EML Payments and Tyro. And yes, I put my money where my mouth was and they’ve had a big run.

Zip Co was up about 74% since I nominated it, which was crazy but tech/payment stocks can do that.

I don’t know what the market will do to this stock in coming weeks but if it goes too low, I will buy more because I suspect its long-term future is OK. I could be wrong and that’s why I’ve bought four stocks to give me diversification. In my overall portfolio, I have around 20 stocks because I know one or two stocks can blow up because of government policy or stupid CEOs. And there are curve balls like pandemics that can make stock markets go very negative.

And while all this could be scary today, keep in mind that US stock markets are still up 37% since the crash smashed equity and all financial markets. It will be the concerns over second-wave infections that will determine how low stocks go.

Personally, I’m going to wait for a base to be formed with these pullbacks and then I’ll start buying more quality companies that will do well in the long term but will probably be bought enthusiastically once second-wave fears dissipate.

The only advice I can offer is: “Watch this space.”

Comments
Get the latest financial, business, and political expert commentary delivered to your inbox.

When you sign up, we will never give away or sell or barter or trade your email address.

And you can unsubscribe at any time!
Subscribe
1300 794 893
© 2006-2021 Switzer. All Rights Reserved. Australian Financial Services Licence Number 286531. 
shopping-cartphoneenvelopedollargraduation-cap linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram