We have experienced one of the fastest and steepest declines in stock prices over the past month. The S&P 500 and Dow Jones Industrial Average lost more than 30% of their value in only 30 days, one of the quickest 30% drops in history. It was also the first 30% decline in more than a decade, and only the sixth we've experienced in the past 50 years.
I moved very quickly and aggressively to take advantage of the opportunity, deploying a substantial amount of cash into existing investments, and buying more than a few stocks I've been eyeing for some time. And I still have cash ready to put to work.
But I'm stopping for now, with no plans to buy any more stocks for a while. It's time for me to step back and let things settle before taking any more action. Frankly, it's the right move for me, and potentially a good idea for many of you reading this. But for many more, following in my footsteps could be a big mistake.
Keep reading to learn why I'm hitting the brakes hard on buying stocks now, and why this might be the right -- or wrong -- course of action for you.
Moving hard and fast
Looking back, it's the height of irony that on Friday, Feb. 21, I wrote an article describing how much cash I have in my portfolio, and my plan to deploy it during a market downturn; we published it over the weekend.
Feb. 21 was exactly one day after the market reached its all-time high. It would lose 33% of its value over the next 31 days. For context, it took 363 days to fall 30% during the global financial crisis.
As I wrote, I thought about the possibility of a downturn coming -- there were already clues that China was taking a huge hit from COVID-19 -- but I wasn't expecting anything close to what actually transpired. From that article:
As much as I think we could see a market downturn in the next year, particularly if China's economy -- both its consumption and its manufacturing output -- slows enough to affect the rest of the world, I realize that it's impossible to predict whether this will happen with any accuracy, or how it would affect stocks. Moreover, it's just as impossible to know when it would happen (if it does) or how much stocks could go up before eventually falling.
Acting quickly to buy the dip
While I took a few nibbles when stocks fell the first 10%, it wasn't until around March 12 that I started getting really greedy, to paraphrase Warren Buffett. Between March 12 and March 27, I made around two dozen separate investments in close to 20 different stocks.
It's easily the most cash I have ever deployed over a two-week period in my life. And I still have a sizable amount of cash to invest after making a large contribution in my solo 401(k).
Why stop now?
I moved fast, and investing so much money across so many companies is a lot to process. I need to take some time to plan my next steps. A few things I want to evaluate:
1. Have I made the best buying decisions so far?
My actions over the past couple of weeks haven't been completely planned. Most of the stocks I bought were on my watch list, or were stocks I already owned and added to. But a good number were companies that weren't necessarily high on my list, including several large banks and a hotel business that were simply too beaten-down to pass up.
I'm not planning to "grade" myself based on the performance of any of these stocks since buying: That would be a trap, applying way too much hindsight bias to my actions. I want to make sure I didn't pass up better opportunities that I should have seen because I didn't stick to my process.
2. How can I maximize my risk-adjusted returns?
Over the past month, we've seen entire industries devastated. It's going to take government intervention to save many airlines and cruise lines, and we could see the same in the hospitality and restaurant industries. Those government bailouts will be aimed at keeping companies afloat and individuals paid, not padding bottom lines and propping up stockholders. And that means investors could still face big losses even if the companies survive.
But there will be good opportunities even in some of these at-risk sectors, just as there were fire-sale opportunities to buy excellent banks that weren't really at risk of failing during the global financial crisis a decade ago. I need to look more closely for those opportunities.
I also intend to do a deep dive into other sectors that aren't really at risk -- including utilities, infrastructure companies, and cyclical businesses like the steel industry -- for companies with strong balance sheets and a history of successfully navigating downturns.
3. Do I have stocks I need to sell?
My M.O. over the past decade has almost entirely been to acquire stocks. I rarely sell, and that means I now own a lot of laggards that it may be in my best interest to move on from. I've lost money on plenty of them, and frankly it's probably time to cut bait, recoup whatever capital I can from these mediocre businesses, and put it to work in my best ideas.
Planning my next steps and taking a break
I've acted so quickly over the past few weeks, I need to take some time to process my decisions and the implications for my family's portfolio. I also, because of the nature of my work, need to step back and consider what's happening in the world, the country, and my community. In a word, I need context.
I've spent the past month hyperfocused on the markets and stocks, and finding great investments. I need to step back from aggressive buying and just process things before deciding what to do next.
Not the best plan for most people
Some of you have done the same as me: aggressively invested money over the past month as stocks have fallen. It might make sense for some of you to also take a breather and regroup.
On the other hand, there are probably far more people reading this who haven't been buying. Probably a lot of you have been selling, driven by fear that things are going to get worse. I think for most people in that situation, sitting on the sidelines or taking money out of the market -- particularly if it's investments for something many years in the future -- is a mistake. Now is an incredible time to be buying stocks, so long as you can own them for many years to come and profit from the eventual recovery and return to normalcy.
Money you're going to count on to pay bills in the next few years? That shouldn't have been in stocks to begin with. That's your margin of safety.
It may not seem like it now, but things will get better. Life will return to normal, and businesses will get back to doing what they do best. When that happens, today's prices will look like the bargains that they are, even if things do get worse between now and then. Whether you should stop buying stocks for a time, or you should be aggressively buying, depends on your situation, not mine.