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Truth is Stranger Than Fiction

  Mike Earl, CFP®, CPWA®


The stock market is good at keeping us humble. Well, it should keep us humble. No one knows what will come next. Whatever your view on how the COVID-19 crisis will play out, none of us can say how global markets will fare in the short-term. In the long-term, the US stock market has always gone up -- that's why new all-time highs are made every so often (including just a few short months ago).

I enjoy talking to my dad about investing. He's had a longer tenure as an investor than me, so I can learn from his past experience -- and attempt to apply it to my own investing life.

Our family's Spring Break trip to Florida in 2000 took place during the infamous dot-com bubble burst. I can vividly remember my dad's reaction to the news of the bursting of the tech bubble. He had some of his portfolio (I'm not sure how much) invested in dot-com stocks via the Nasdaq Composite Index, which declined by 25% that week of our Spring Break. It ultimately took 15 years for the Nasdaq to get back to its high from the year 2000.

My dad handled the news really well. He was disappointed, of course. But he moved on. It had not broken our family financially, by any means. But for me, it was a helpful lesson on the perils of chasing the hottest investment idea around. The technology sector today is vastly superior to the technology sector of the late 1990s. Today, many tech stocks have incredible profits. Back then, there were plenty of tech stocks that had never turned a profit.

I try to remind myself often that when it comes to markets, truth is stranger than fiction. By acknowledging this simple maxim (another proverb attributed to Mark Twain), I hope to guard myself against the ever-present temptation to make predictions about short-term stock market performance – or the performance of individual stocks, industries, or sectors.

Dad has learned a lot of lessons over his investment lifetime, but he still likes to dabble in momentum stocks. I know it can be a thrill to own exciting stocks. Take this text exchange we had yesterday:

In the morning, he was looking at his profits in Shopify, a Canadian technology company that hit new all-time highs yesterday. In the afternoon, he was looking at the stunning collapse of oil prices (he has not invested directly in oil or energy; he was simply noting the chaos in the oil market).

My dad's texts yesterday highlighted two stories I could never have dreamed up: Shopify with a $70 billion market cap; and the price of oil going negative.

Shopify is a Canadian software company that helps businesses grow their e-commerce revenue. The stock is up over 2,000% over the last five years. The company is struggling to earn a profit, with annual sales of $1.6 billion.

A $70 billion market cap makes their valuation larger than Target Corporation, our Minnesota-based favorite that has annual revenue of $78 billion and income of $3.3 billion.

Is Shopify a more valuable enterprise than Target? Only time will tell. I don’t know what will happen, and I don't I have a dog in that fight. But I do know that I couldn't have predicted this continued, meteoric rise in Shopify's stock price (justified or not).

The second wild story was the price of crude oil going negative yesterday. As the New York Times put it, "Something bizarre happened in the oil markets on Monday: Prices fell so much that some traders paid buyers to take oil off their hands." Strange times, indeed. While the price of West Texas crude oil is down over 72% so far in 2020, that hasn’t stopped investors from pouring over $5 billion into USO, an ETF (investment) that attempts to track the price of oil:

You got that? The fund is down 72% this year, yet more than $5 billion of new money has poured into the fund. It’s the opposite of performance-chasing. This is contrarian investing (whether it will work out remains to be seen).

We have had a number of clients and friends ask us some variant of the following question:

“What can we invest in now to take advantage of this downturn?”

It’s an admirable impulse – and one that is far better than fear. But it can be a slightly misguided impulse, as it can lead these folks to focus on a very specific investment bet instead of making great financial planning decisions on a macro level.

I don’t know if/when airline stocks, cruise line stocks, and energy company stocks are going to recover. I sure hope they do, but I’m not going to make a concentrated financial bet that they do.

The best way to take advantage of equity market declines is to:

  • Invest more money (if you’re still accumulating assets) in a diversified portfolio; or
  • Stay invested in equities (if you’re in retirement/distributing from your portfolio).

I don't know what the recovery of global markets and economies from COVID-19 will look like. But I do know we will recover. And by owning a slice of the US stock market, I stand to take advantage of today's equity prices in the long run.

Disclosures:
Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the team members providing such comments, and should not be regarded as a description of advisory services provided by The Wealth Group or performance returns of any client of The Wealth Group.

The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The Wealth Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.