It has been exactly five years since the World Health Organization declared COVID-19 a pandemic, spurring travel bans, school closures and major panic. This also means that it has been exactly four years and 364 days since the 11 year “bull” market ended in the U.S. due to concerns about coronavirus. This bull market started in 2009 after the Great Recession and is the longest bull market to date, marking Mar. 12, 2020, as a historic moment in stock history when “bear” sentiment took over.
No one expects a bull market to last forever and without challenge. In fact, during bull markets, it is expected that there will be “corrections,” smaller but normal downturns to balance the market. Despite knowing that their fortune would sooner or later come to an end, no one expected, nor could have estimated, the massive impact that the pandemic had on our economy. Investors pulled out of stocks in a frenzy, crushing the market and losing potential profits that they would have otherwise had if they had held steady in their positions. This is a much-needed reminder for college-aged investors, both then and now, that you should never get too comfortable in the market, but you also shouldn’t let your speculative predictions or panic from those around you dictate your investment decisions, especially not now.
Today’s post-COVID market is incredibly volatile, reacting strongly to geopolitical developments and economic indicators. This can cause sharp downturns like we saw with the S&P 500 Index this February. It can also trigger major selloffs, like what happened with NVIDIA in late January and late February. Despite how tempting it might be to sell during these moments, it is important to distinguish between an impulsive and speculative market reaction and a true decline in the quality of the company, effectively establishing your tolerance as an investor.
One of the best examples of this comes from the Dotcom Bubble in 2000, specifically with everyone’s favorite shopping site, Amazon. During the bubble burst in 2000, many early Amazon investors sold their shares of the company, fearing that the company wouldn’t survive the crash. Ultimately, over a two-year period, Amazon lost more than 90% of its value. Despite the negative sentiment and the panic selling, Amazon was actually a company with great potential and talented leadership at the time. The underlying value of the company was huge, but panic sellers didn’t think about this. Had they held their shares, they would have been sitting on huge piles of cash today.
In addition to being impulsive, the market is often simply wrong in its predictions. Oftentimes, people will attempt to predict Federal Reserve interest rate changes. In fact, the Fed releases its own guidance and projections for interest rates. The market moves in relation to these predictions, favoring lower rates that make borrowing cheaper and spending increase. But the most notable aspect of interest rate predictions is that most of the time, they are dead wrong. While it is tempting to see these predictions and assume that they will be accurate, it is incredibly risky to base your investment decisions off of speculation that is known to be inaccurate. Rather, it is more effective to look at the multiple factors that go into how the market fluctuates, such as other economic data, individual company news or political events. This way you can make a well-rounded and well-informed decision.
Long-term effective and profitable investment decisions don’t happen because you heard your friends say that they think a company is going to take off. They don’t happen when you only look at one economic trend and base an entire purchase on it. The best investment decisions happen when you wait patiently and research diligently, trying to understand the true underlying value of a company and the market it is in. So, the next time a major event happens, or you see the market start to crumble, don’t succumb to the pressure. As Warren Buffett once said, “Be fearful when others are greedy. Be greedy when others are fearful.”