In a 1959 speech, John F. Kennedy famously said: “When written in Chinese, the word ‘crisis’ is composed of two characters — one represents danger and one represents opportunity.” Although today, it is widely recognized that this is not the correct interpretation of the Chinese characters, President Kennedy’s wisdom about a crisis yielding unique opportunities may be more important than ever.
“Objective judgment, now at this very moment.
Unselfish action, now at this very moment.
Willing acceptance — now at this very moment — of all external events. That’s all you need.”
Iconic entrepreneurs: John D. Rockefeller, Thomas Edison, and Steve Jobs all used this same formula when obstacles confronted them, even using the situation to fuel their immense ambitions. For them, the obstacle was the way.
Amid the chaotic environment globally coupled with the economic slowdown, the sentiment is extremely negative. Everyone is contemplating the next action and praying for things to fall into place.
Steve Jobs used to tell people to go for a walk and “zoom-out”, to change your perspective and to look at the bigger picture.
So then, Let’s zoom out and take a look at the bigger picture.
The COVID-19 pandemic has pushed stocks far into bear market territory. From its peak on February 19th, the S&P SL20 has fallen 31% the S&P 500 has fallen almost 30%.
While this volatility can cause investors to panic, it’s imperative to keep a long-term perspective. Black swan events, which are defined as rare and unexpected events with severe consequences, have come and gone throughout history.
It’s difficult to predict how long COVID-19 will impact markets, as its societal and financial disruption is unprecedented. In fact, the S&P SL20 fell into bear market territory in just a matter of weeks.
Considering the high levels of uncertainty, what should investors do?
Buy on Fear, Sell on Greed?
Legendary investor Warren Buffet is a big proponent of this strategy. When others are greedy — typically when prices are boiling over — assets may be overpriced. However, because the grass is always greener on the other side, on the flipside are good buying opportunities stemming from others’ fear.
While most investors are panicking as asset prices take a nose-dive, those with a cool head are able to see the resulting low prices as a unique buying opportunity. Buying assets from those restless individuals driven by fear is like buying them on sale. Often, fear drives asset prices well below their fundamental or intrinsic values, rewarding patient investors who allow prices to revert to their expected levels.
It goes without saying that, profiting from investing in a crisis requires discipline, patience, and, of course, enough wealth in liquid assets available to make opportunistic purchases.
When calamity strikes, markets fear the worst and stocks are punished accordingly. But historically, when the dust clears, optimism returns and prices bounce back to where they were, with markets responding once more to fundamental signals rather than to perceived strife.
Those investors who sold on the fear found themselves having to buy back their portfolios at higher prices, while patient investors were rewarded.
Behavioral finance shows that people, rather than being merely risk-averse, are actually more loss-averse. This means that people feel the emotional pain of a loss much more than the pleasure gained from an equal-sized profit.
Take for example a blackjack player at a casino. When he’s on a winning streak, he may start playing more conservatively and betting smaller amounts to preserve his winnings. If that same player is stuck in the hole, however, he may take on much more risk by doubling down or increasing bets on riskier hands in order to break even. Investors behave rather similarly.
These emotional biases may persist even after a recovery has begun. In a survey by an online broker showed that 93% of millennials indicated that they distrust the markets and are less confident about investing as a result. Even with historically low-interest rates, a huge proportion of this generation’s wealth is in the form of cash. Due to the crisis, millennials are not gaining the stock and bond market exposure that has helped older generations accumulate wealth.
Of course, timing is everything, and buying too early or late, or holding on to a short position for too long, can serve to compound losses and take away from potential gains.
Do we gaze into the unfolding potential of change, or do we focus on the loss of the familiar? The answer to this reveals your relationship between loss and opportunity. Ultimately the question is whether we choose to freeze in the panic of the unfamiliar or we seek to capitalize on the new territory that’s unfolding for us. The former presents anxiety and retreat, the latter evokes growth.
In the meantime, it’s important to remember that the crises of history often look like buying opportunities in the rear-view mirror; and as the old proverb goes: None but the brave deserve the fair.