“What goes up, must come down,” is a time-tested phrase that was proven correct with savage clarity during this week’s stock market mayhem. Financial panics are as old as money itself. Whether this is your very first crash as a stock market investor, or you are an old pro who has seen it all, here are three tips to minimize the damage to your portfolio and make sure that you survive the Great Coronavirus panic of 2020.
1. The Crash Isn’t When Fortunes Are Lost. The Crash Is When Fortunes Are MADE.
This may seem like a counterintuitive statement when everyone is panicking around you. But staying calm and deliberate when everyone else is panicking is how real money is made in the stock market.
Think about it like this. As a shareholder in a publicly traded firm, you are an owner in a business. There are two reasons why the value of your stake could go up, or go down. The first reason would be if something fundamental has changed about your business and the market it operates in. For example, a business that sold horse buggies would have become a poor investment as cars became the norm in early 20th century America. Kmart used to be a great business when department stores were the main way that people satisfied everyday casual needs. But with the rise of Amazon and the convenience of online shopping, the fundamental market in which Kmart operated changed, resulting in a massive loss in value for Kmart. If a fundamental aspect of a business changes, it may be wise to sell.
But the biggest financial opportunity you will ever encounter is when everyone else is tying themselves in knots over a condition that only temporarily affects the business that you own. The biotech and pharmaceutical world is a fabulous example of this phenomenon. This week we experienced one of the most severe stock market crashes in recent history. Everything went down, because, well, everything went down. But even if our current Coronavirus scare morphs into a drawn out recession, does that mean that 7 billion people on planet Earth will no longer need cures or medical advances? Even if the American or Global economy is temporarily hobbled, does that mean that pharma icons like Pfizer ($PFE), Merck ($MRK), and Eli Lilly ($LLY) are likely to fade into irrelevance the way Kmart did?
Very unlikely. If anything, the current international health freakout proves conclusively that people continue to value their health over all else. Healthcare remains a good place to invest your money for the long term.
Ok, so solid healthcare concerns will continue to serve a vital societal need, and demand will eventually recover. But why would now be a good time to invest? Why not just hide out and wait for the world to regain its footing?
Because now is when foolish or desperate people are selling cheap. To understand the magnitude of this opportunity, let’s look at some math.
Let’s say you invested $10,000 in Merck Pharmaceutical ($MRK) on January 3rd, 2011. As of February of this year, that investment would have returned 13% annually and your investment would be worth an impressive $31,141. After the trauma of 2008 and 2009, you would have waited until recovery seemed to be in the air, and earned a nice return.
But let’s say you bought in the midst of the chaos of the last financial crises. While stock brokers and investment gurus were busy jumping out of windows, you invested your $10,000 in Merck during July 2009. By February of this year, you would have earned an astounding 15.4% annual return, and your total shareholding would be worth a whopping $46,397. Decisive action during a crisis can lead to a courageous reward!
This isn’t some kind of new idea that I cooked up. The idea of running towards a burning financial fire, instead of away from it, is as old as money itself. As the Roman historian Pliny the Younger was quoted during the eruption of Mt. Vesuvius, audaces fortuna iuvat, “Fortune favors the bold.” How will your history be written during this crisis?
2. Cash Is King
There will be many deaths and near death experiences in this crises. Financial deaths of under capitalized biotech companies. I have written at length about the pros and cons of unprofitable companies. During moments of financial shock, the cons of unprofitability are about to become crystal clear.
In the jungle of Wall Street, the strong prey upon the weak. Expect a lot of this over the coming months. There are a lot of smaller, newer biotechs out there that have been making scientific progress on promising molecules. But they were funded in such a way as to require constant infusions of fresh cash. And why not? It seemed like anybody with a PhD could access millions as recently as a few months ago.
That was then, this is now. In just a few short weeks, those torrents of random investor cash are about to become a trickle in a barren desert of financial austerity. Many promising biotechs will arrive at death’s doorstep, not for lack of promising science, but for a sudden cash crunch that will transform the industry.
But promising biotechs rarely die outright; rather they are acquired for a song by stronger competitors, competitors with cash reserves deep enough to make it through the crises. As you scan a forlorn financial landscape cluttered with the corpses of dead and dying unicorn stocks, seek out larger, more established innovation companies that were built to survive a crisis. They will feed on their weaker biotech brethren, and emerge from the crises even stronger.
Take Regeneron ($REGN) pharmaceuticals, for example. Not only is Regeron cash flow positive, due to products that sell in almost any economic state, but management has wisely built up a $3 billion war chest. Another example would be Gilead ($GILD). As of year end 2019, they had a staggering $24 billion dollars laying around in bank accounts, in addition to life sustaining products that sell in almost any environment. Gilead was already primed to make several acquisitions in order to boost future growth. Imagine how much farther that investment capital will go now that most biotech stocks are selling at 20-50% off their former value!
The best advice for most investors right now is to simply do nothing. But if you must sell something, if you feel compelled to participate in the frantic melee that has become Wall Street, cull the weakest from your herd. How would you identify these? First, focus on companies that are either unprofitable, or even pre-revenue. Second, go to the company’s cash flow sheet. Look at the bottom line. How much do they burn every year? Every quarter? Then compare that to the cash holding revealed on the balance sheet. How long can they burn cash before they need additional investment to keep the lights on? A good candidate to sell would be any company that would run out of cash in the next 18 months. Money is about to become a whole lot harder to come by.
3. Everybody Pays For Their Education, One Way Or Another
Hysteria can manifest itself in a variety of different ways during the fog of war. Perhaps one of the most virulent strains of hysteria that can strike is self blame. A lot of people see diminished portfolios, and will insist they did something wrong to themselves, and are at fault for “lost” money.
Of course this line of thinking may be invalid for a host of reasons. Money “lost” during a financial crisis may not be lost at all, but rather temporarily missing, waiting for an eventual resurrection in share price. Mistakes in the timing of certain investments, or the price paid for certain investments, may just have been hard to avoid given the particular circumstances at a particular time. But the most important thing to remember is that mistakes are learning opportunities. If you choose to make your mistakes into positive lessons, rather constantly reliving financial tragedies in your mind, you will have earned an MBA in the school of life.
Believe me when I tell you that I’ve lost a lot of money over the years in the stock market. I have both “temporarily misplaced” money during certain shock events, and I have even vaporized a good deal through just plain inexperience and, even, occasional stupidity.
But those weren’t losses. Those were investments. If you paid $200,000 to get a Harvard MBA (which people do), would you consider that money “lost” or “invested?”
Same thing with defeats, temporary or otherwise, in the stock market. You can run away, bury your head in the sand, and swear off stocks forever. Or you can treat the incident as a lesson from the School of Hard Knocks, and come back tougher. (And, eventually richer. Much richer. I can promise you that). You choose your attitude when faced by setbacks. The choice you make will determine your long term financial status.
You were only promised three tips at the top of this post, but if you have made it this far, you may already have a budding relationship with www.sickeconomics.com
Many have noticed that our newsletter stopped, and our publication rate slowed. Does this mean that we are out of the game? Have we taken a beating in the markets and sworn of the dark arts of Wall Street?
No chance!!! We are coming back stronger than ever. Operations have slowed due to recent renovations on our site. Look for the publication of our upcoming ebook, “Your First Biotech Million.” As American Revolutionary Patriot John Paul Jones once declared in troubled times:
“WE HAVE ONLY JUST BEGUN TO FIGHT.”