Finally, if you know someone who is suffering, then please show them some extra love by being available to chat, sending some encouraging and grateful messages, or helping them get help.
Also, if you know someone living in the Bay Area who is suffering because they’re out of work, please pass along the following resources: Bay Area COVID-19 Resources.
If you know someone in the Puget Sound Area who needs some additional help due to COVID-19, please send them these resources: Washington State Department of Financial Institutions, Comcast free wifi, Scholastic free online learning.
Finally, I’m looking for a trustworthy charity to donate to that specializes in helping the folks who are out of work due to the COVID-19 coronavirus outbreak. If you know of any such charities, please reach out to me.
I’m not a financial planner, so, as always, [insert standard disclaimer here].
Okay, now on to the money.
What’s going on in the markets?
The stock market is a machine driven by expectations. These expectations vacillate between fear and greed. It’s easy to forget that markets are driven by our base human emotions. Though we hear about algorithms and quant trading, all of these systems are ultimately commanded by humans. We may have shiny metrics such as earnings per share, price to earnings ratio, beta, and free cash flow trying to convince us that the market is based on something more than human emotion, but these metrics just serve as glorified window dressing. Due to the disruption that COVID-19 is causing to our economy, swaths of investors now expect most companies to suffer, thereby jeopardizing their future earning prospects. Because of this expectation, fear has taken hold in the market.
What should I be doing with my money?
Nothing. If you have already maxed out your 401k and are investing in a well-balanced target retirement index fund, then proceed as planned. If your company is already providing you with a 401k match, then you should continue making contributions.
My portfolio has been cut in half; what should I do?
Should I be checking the stock market or my net worth on mint.com every day?
Why shouldn’t I check my net worth?
You have to ask yourself how many meaningful insights you will glean from checking your net worth or your stock portfolio. Zero. If anything, obsessively checking your net worth or stocks will make you panic and do something silly like selling your investments now.
Also, basing your happiness on your net worth is a joke. If you really want to know why basing your happiness or your social standing sets you on a path to become a slave to your finances, simply remember that there comes a point where “net worth” means “how much stuff you can buy.” For instance, when I hear that X rich person is worth X billions of dollars, I think, “Wow, that means he can buy billions of beanie babies.”
But what about FIRE?
Financial Independence Retire Early? Ahh yes. These dreams gain popularity during any bull market. But for every generation, the idea of retiring early is repackaged and referred to under a different name: retire before 40, IPO to retirement, four-hour workweek, lifestyle design, mini retirements, etc. People forecast that their portfolios will grow a cushy 7% per year in perpetuity and they will never get sick, have kids, or need to help their loved ones. For every 1,000 blog posts on why people quit their jobs and retire early, you might get a handful of people who admit that FIRE failed and now they’re back to work, but with fewer savings because they lived off the returns from their early savings instead of letting them compound.
What should I be focusing my time on?
Your job and your loved ones. A lot of people need help right now and are struggling to make ends meet. People are losing their jobs. The elderly are unable to get the food and services they need to survive. The world is suffering right now. Focus on helping others. The market will recover.
Right…so what about my job, again? Should I focus on that?
Yes. I created the Silicon Valley Investors Club so tech employees can discuss investing topics from a tech employee’s point of view. Most investing groups focus on people trying to escape their jobs because they are unhappy with their work. We are the lucky few (and I stress lucky because we are blessed to work in tech) who have tech jobs with employers who treat us pretty well.
Your appreciation for your job is inversely correlated to the value of the stock market. When the stock market is booming, most people are trying to figure out ways to live on their investments and quit their jobs. When the stock market crashes and layoffs begin, we all of a sudden have a newfound appreciation for our jobs.
Why is my tech job a superpower?
Cash flow. A biweekly paycheck, great colleagues, benefits, possibly stock, ability to work from home, and, if you’re lucky, a bonus: all things that are superpowers during a recession. And let’s not forget that vital social interaction.
Your job provides you with the vital cash that makes your investment goals possible. The value of cash is inversely correlated to current market sentiment. When everyone loves the stock market, we hate cash; when everyone hates the stock market, we can’t get enough cash.
Our favorite uncle Warren Buffett has been attacked over the last few years for under-performing on the market, but soon he will be hailed as a hero when he scoops up deals for bargain prices.
I have extra cash and think it’s time for me to go all in. What should I do?
Never go all in. First of all, make sure you have an emergency fund (six months of living expenses in the bank). We don’t know how bad this recession could be and you might be in a situation where your job is at risk and you need that money. If you HAVE to invest, put a portion of your money in and leave enough in reserve for future investments because no one can call a top or bottom in the market. You can also try using the Kelly Criterion to test your investment assumptions.
Should I take out a loan to invest in the market?
NO. The name of the game is to stay in the game as long as possible. You never take risks that can blow you out of the game. You only invest with cash you have available. Debt is okay to use when you invest in housing (so long as the rents are covering your debt service by a healthy margin), but as far as the stock market is concerned, that’s a big no-no. Why? Not only could you lose money on your investment, but you could also lose your job and suddenly have a monthly debt payment to cover. #BigYikes! If you want to see how this can implode, check out margin trading during the Great Depression.
“. . . don’t watch the market closely. The money is made in investments by investing and by owning good companies for long periods of time.” —Warren Buffett
Should I buy any stock I can get my hands on because they are cheap?
When you purchase a business you need to think in terms of not what is cheap, but what has enduring value. Don’t confuse a trade with an investment. You trade when you buy a stock that you intend to hold for a short period of time and then sell to make a quick profit. This is a high-risk strategy that I don’t recommend.
When you invest, on the other hand, you buy a stock and intend to hold it for a long period of time in order to take advantage of the company’s business model and future profitability.
If you intend to use the long-term hold strategy, don’t buy companies that are cheap and have bad business models (airlines, commodity producers, or firms in highly competitive markets with no distinguishing characteristics and low profit margins). You should buy companies with great business models that will lead to higher profitability over the long term.
So, I should ONLY invest in the stock market during this period of time?
No. A healthy portfolio has the following: index funds, individual stocks, real estate, precious metals, private equity, and venture capital. Right now, a lot of you are just in the stock category, but you might find yourself in an opportunity to diversify into other asset classes. Which ones? That’s up to you.
What skills do great investors have that normal investors lack?
Good question. The investors I’ve studied are patient, a bit socially inept/quirky (which means they don’t follow the latest investing trends), focused more on qualitative factors that drive businesses and less on quantitative factors, and are students of human psychology and history.
They also keep some form of an investment journal where they write down why they are buying X company, what would have to change in order for them to sell the investment, and when they plan to exit their position (assuming this is stock).
You usually write some touchy-feely personal development stuff. Do you have any of that about stocks?
Not a fully formulated thought, but I’ve noticed during my limited time on this planet that when calamities happen, it opens up all sorts of different forms of opportunities: the ability to learn to appreciate what we have, the time to bury the hatchet and reconnect with loved ones you might have fought with in the past, or maybe a big career break.
Opportunities like these are largely due to people being served a reality check that our lives are finite, and sometimes the things we were striving for were really just games. Many of us will shift into a fear-induced defensive mode, become argumentative with others, curse the darkness, and just duck for cover. But what we should be doing is trying to figure out a way to keep ourselves in check so we can see things clearly. When others are losing their minds, those of us who are at peace with our emotions can go on the offensive in our lives and find new opportunities, learn new skills, and prop up the people in need. You just have to keep your eyes open and resist freaking out when everyone else does.
Do you have any other investment tips for me?
I have more questions. Who can I ask?
You can post them to the group so we can all learn together!
Anyways, that’s all for now. Be safe out there!