In the history of the Stock market, there are several market crashes. And at the moment, in the year 2020, we are experiencing one of them. Withing weeks investors have lost a considerable amount of their hard-earned wealth. In this article, we are going to discuss what should we do, based on the ideas of stock market giants. Mainly based on three experts on the field. Buffet, Chamath and Cuban.
What are the impacts on the stock market due to Coronavirus?
The answer is simple. Nature of this disease is that people don’t know who has it until verified. But it is spreading. Then, people need to stop or reduce interacting with each other to minimize the damage. Let us take some examples.
Travel Industry. As people are fearful of getting sick, they need to stop travelling here and there. Most people are staying at home. No travel means no revenue for the industry. But the companies have to maintain themself, have to pay salaries. Basically they have expenses but no revenue. Travel industry and its related sub-industries worth $9 trillion of the world’s economy. If this industry is going to decline 50%-60%, that means 5% of the worlds GDP.
Sports Industry. Most of the sports events are getting cancelled or happening without audiences. Most of the cricket tournaments are cancelled, No football matches, no major athletics events. This means companies related to the sports industry is not generating any revenues.
Schools are getting closed, most of the companies asking their employees to stay home rather than going to work. For example, Italy is closing almost everything except groceries and pharmacies. Most of the countries are in complete lockdown. No one is going outside, no one is buying anything. What does this means for businesses, they are not producing money. Then the GDP is declining. Which causes the stock market dramatically going down. This will make the worst when people react with fear. Everyone is acting with their emotions rather than making decisions. This causes massive sell-offs in the market.
And the market is in the boom phase for nearly 11 years. That means it is very much vulnerable to a crash for several years.
How long will this bear market last?
The simple answer is “No one knows”. For a more detailed answer, we should look at history. From history, we can see that bull market exists far more years than bear markets. It takes much more time to create up trending markets and they last long. But bear markets are short. It takes much less time to come from top to bottom, and the good thing is they don’t last long.
If we look at the above chart we can see that bear markets last from 3months to 25 months. The average is 14 months. That means little more than one year. Coming back to 2020 market crash, we are too early to guess the bottom.
How should I react to 2020 market crash?
Well, in this case, we should listen to what experts are saying. First, let’s go with Mark Cuban. He is an American investor and entrepreneur. He is the owner of the National Basketball Association (NBA)’s Dallas Mavericks and chairman of AXS TV. He said,
I bought some Twitter today. I’m a long-term holder there. I owned shares going into this decline. I don’t know what’s going to happen or when, but I think long-term we’ll be okayCuban said on CNBC’s “Fast Money Halftime Report.”
Seems like Cuban is playing the safe game. He is buying but slowly. From the perspective of an investor, he is doing the right thing.
Let’s look at what Warren Buffett is doing. He is the chairman and CEO of Berkshire Hathaway, and one of the famous investors in the world.
I don’t think anybody knows what the market is going to do,” Buffett said. “You really can’t predict the market by reading the daily newspaper, that is for sure. And you certainly can’t predict the market by listening to me.Warren Buffett interview with CNBC
Basically he is suggesting to go with the current valuation of companies rather than going with what others are doing. Lower the market goes, higher the discount you get. Just focus on good companies at discounted prices. This aligns with his famous saying,
Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.Warren Buffett
Both Warren and Cuban is predicting what is going to happen in the long term. And they are collecting companies while they are cheap. Let’s see what is going to happen in the short term.
This is a very, very untested moment in our history. It’s not like the great financial crisis, it’s not like the dot-com bubble. It’s like both at the same time.Chamath Palihapitiya on CSBN
He is talking about the severity and depth of the great financial crisis and the time period of the dot-com bubble. According to Chamath, it is too soon to guess the market bottom. He is suggesting that we are still nowhere near the market bottom.
According to the above experts’ ideas, we can do two things in the current situation.
- Buying stocks on sale for the long term
Just like Buffett and Cuban are doing. You can start buying great companies at a discounted price. But remember, they both are doing it slowly. This is a good strategy as long as you are long term investor. By doing this, you can target for high dividend yields. It is a great opportunity to rebalance your portfolio.
- Wait and see
Just like Chamath is suggesting, things may get worse over time. It is safe to wait and see. You can get companies a lot cheaper if you do this. Just make sure to ready your cash for the upcoming sale.
Following Video is a great resource that referred while writing this article.