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Two Tunnels of Crisis and Contrarian Investing

I guess in the future this will be remembered as the "2020 Coronavirus Lockdown Crisis". Although it is almost impossible to predict what will happen with the stock market in the near-term future, seeing what the stock market has been doing over the past couple of weeks, I feel compelled to share my thoughts on the current market. First, let me explain the two tunnels we are going through. 

I) Pandemic lockdown - "the First Tunnel"

Economic activities have been dead due to the pandemic and the lockdown. It is like we are in the middle of a dark tunnel. In the darkness, people are scared and fearful.  Everyone wants to see the light at the end of this First Tunnel. And as such, the media has been focused on reporting any news that signals a flattening of "the virus curve" and reopening the economy. And people buy stocks on those news. However, I want to urge you to see the big picture and look beyond this pandemic lockdown tunnel. 

II) Economic recession - "the Second Tunnel"

It is quite certain that we are entering a bad economic recession. This Second Tunnel will be even darker and much longer than the first one. People will start to realize this once companies start releasing their Q1 earnings results. Globally, we will face a massive liquidity crisis. Liquidity will dry up fast and a number of bankruptcy news will break, starting with unprofitable, highly leveraged companies. The planned $4.5 trillion stimulus package by the U.S. government and the Fed will hopefully save some, but unfortunately not all. While an insane amount of rescue money, it is still only 20% of U.S. GDP and in no way it will accurately get distributed to those who really need it. This effort to me is like trying to cover just a few holes at the bottom of a sinking ship. You can slow down the sinking but won't be able to save the ship. 

III) Don't buy stocks now.

First, please do not confuse the end of the First Tunnel with the end of the crisis. As an optimist, I believe the world will soon get out of the pandemic lockdown tunnel and we already started seeing this in some of Asian countries. Hopefully, we will soon hear positive news that sheds light at the end of this First Tunnel. Then get excited, be happy and get ready to go back to normal life. But separately, I would discourage you from buying stocks on such news. Again, we will be entering the Second Tunnel as soon as we get out of the first one, maybe even while we are in the first one. In the next few months, we will be reminded of the harsh reality ahead of us by a series of bankruptcies and dismal macroeconomic data. For investors, the stock market will be no fun and very likely head south for a while.  

IV) When are we buying? - "Contrarian investing"

Excuse all my negative vibes and now I want you to be more optimistic about the situation. Typically, there is no better time to be a contrarian investor than during a market crash. So when will the market bottom? I have no idea. I always say "instead of trying to pick the bottom, just keep buying when your stocks get cheaper and cheaper and cheaper and cheaper". To be able to do this, I want you to be prepared. Hoard cash, not toilet paper for God's sake. During a market crash, the biggest pain is that you don't have any more money to buy stocks that are now much cheaper. Generally speaking, typically the price hits bottom when the level of fear is peaking, or when all your smart friends and intelligent colleagues are pessimistically telling you the worst is yet to come. If I add one more point, as someone who claims to understand the market herd, the level of fear will peak and asset prices will be the lowest more likely in the early stage of the Second Tunnel like during the first quarter of recession, not right in the middle.  

V) Disruptors vs Disruptees

Bear markets require greater skills of selecting right stocks than bull markets. If you want to invest in individual stocks, focus on disruptors and stay away from disruptees. If you aren't sure what are disruptors and disruptees, here are some examples: e-commerce vs brick-and-mortar, ride-share vs taxi/car rental, online advertising vs traditional media, digital payment vs cash, electronic vehicles vs ICE vehicles and many more. Typically, the process of disruption in businesses accelerates during recessions. Consumers become cheaper and harder-to-please when the economy is bad. So, with all good reasons, old traditional legacy businesses will be defeated by new innovative disruptors during the upcoming recession. Please do not make the mistake of buying a "value" stock based on the trading multiples. Buy growing disruptors with sufficient liquidity who can weather the storm for the next two years. Then by the time we exit the Second Tunnel, you will look great.  

I hope you find this helpful. More importantly than anything, stay safe and stay positive. This too shall pass.

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