Survive and Prepare — an investor’s guide to the apocalypse

The Australian share market has lost close to 30% in just three weeks. That’s something we’ve seen only a handful of times in all of history.

It’s far from an irrational move either, when you consider just how quickly the coronavirus pandemic has escalated.

Consider this:

  • Entire countries have gone into lock down
  • Infections are continuing to grow at an exponential rate in increasing locations
  • We’ve seen emergency rate cuts and stimulus packages announced 
  • The oil price is collapsing and risks badly hurting the US shale industry and credit markets
  • Containment efforts are failing (the NSW Chief Health Officer said they’re expecting 1.5 million people in the state to be infected with covid-19 in the first phase)
  • Cases in the US, the world’s largest market, are rising fast. The Government response has been poor, and the healthcare system badly broken.
  • Mass bankruptcies are likely in exposed industries
  • Households are entering this crisis with record levels of debt

We don’t know what the economic impact will be, precisely, but all the experts seem to agree it will be massive. There’s little doubt we’ll see a global recession.

At the same time, this will end. Even under the worst case scenario, we will come out the other side of this crisis. We don’t know when that will be, but odds are it won’t be any time soon.

As investors, then, our goal is two-fold: to survive the bear market and to prepare for the (eventual) recovery.

Focus on surviving, not performance

While you might be sitting on some painful losses, there’s nothing you can do about that now. Don’t be distracted by it.

Virtually every stock is going to be hit hard at times like this, but it’s the ones that represent strong businesses that will endure (and, eventually, bounce back). This is the time to pay particular attention to balance sheets, and you need to be very fussy.

Don’t hesitate to sell a holding if the investment case no longer stacks up (or, like some, you realise you never really had one to begin with). Whatever the loss, it doesn’t matter — you don’t have to recover lost ground in the same stock.

Surviving is about focusing on the future, not lamenting the past.

Be prepared

We will almost certainly look back on this period as an extremely attractive time to buy shares. But to imagine that we can sell before any further falls, and buy back in at just the right time are the feverish dreams of a madman.

At any rate, your goal isn’t about picking highs and lows, it’s about buying quality assets at attractive prices.

And you don’t have to bet the farm on one roll of the dice.

If you’re fortunate enough to have some investable cash, a sensible approach would be to divide that up into (say) five chunks, and commit to gradually putting each to work over the next 12 months. With only five ‘bullets in the chamber’ you’ll be more judicious in your actions, and will likely lock in some very attractive prices. 

Of course, the market could continue to fall once you’ve exhausted your capital, and/or remain depressed for a good while after, but so long as you’ve acquired strong businesses at sensible prices, you’ll be well prepared when optimism returns to the market.

Stay calm

One final point, even if the situation resolves itself relatively quickly (which is probably unlikely), it will feel like a long journey. Fear, doubt and regret will be your companions.

Panic, though, is something you must avoid at all costs.

Focus on what the world looks like a few years from now, and double down on your research.

Do the work, make a plan, and stick to it.

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Disclaimer– The author may hold positions in the stocks mentioned in this publication, at the time of writing. The information contained in the publication and the links shared are general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. For errors that warrant correction please contact the editor at [email protected].

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