Here's a simple formula that can allow anyone to earn solid returns on the stock market:
- Invest in quality stocks.
- Be patient, and hold these stocks for a while.
Both steps sound easy enough, but they can be difficult to execute, particularly in the face of volatility. And the past 12 months have cursed investors with years' worth of volatility. We witnessed a global pandemic that forced many countries to issue stay-at-home orders for much of their populations, thereby slowing down their economies.
The initial effect of the COVID-19 outbreak on the stock market was devastating. For example, the Dow Jones index fell into bear-market territory -- defined as a 20% drop from its most recent high -- in a mere 20 days in March, the fastest such descent in history. The broader market has largely recovered, but the wild ride investors experienced in 2020 has undoubtedly taught (or reinforced) some valuable lessons.
Here are just two of these lessons.
1. Your emotions are your worst enemy
For investors, daily fluctuations in the prices of securities are a fact of life. However, these day-to-day changes mean very little in the grand scheme of things. In the long run, stocks of great companies will generally continue to climb. But remembering this bedrock investing principle can be difficult when you see your stocks fall precipitously in a short period, which is precisely what happened across the board in early 2020.
Take, for instance, Intuitive Surgical (ISRG 1.17%), a company that focuses on developing and marketing devices for robotic-assisted surgery. Between Feb. 20 and March 23, shares of Intuitive Surgical dropped by about 40%. This decline was, of course, due to the pandemic. The healthcare company makes a large percentage of its revenue from procedures performed with its signature da Vinci surgical system. But stay-at-home orders prevented elective surgeries, and healthcare facilities had to focus on treating patients with COVID-19. So the number of procedures conducted with the da Vinci system dropped, which negatively affected the company's top line.
A 40% drop is significant, and it can be easy for investors to let their emotions lead them to sell in a panic, getting rid of their securities as the market starts to tumble. But that's precisely the wrong thing to do. If the thesis behind your investment in a company remains unchanged, buying more shares when they get cheaper is a much better idea than selling the ones you own. In the case of Intuitive Surgical, while the pandemic initially harmed its business, its long-term thesis remains intact.
Intuitive is one of the leaders in the robotic-assisted surgery market, which is ripe for growth, and the company also has a strong competitive advantage. Those who held their shares of Intuitive Surgical through the market crash -- or bought more when they were down -- are probably very happy right now: The stock is up by 119.7% since March 23, and by 35.6% over the past 12 months. Succumbing to the temptation to sell this top healthcare stock would have been the wrong choice.
2. Always be watching for innovative businesses
If you covered your eyes in horror at the height of the pandemic, that's certainly understandable. But for investors, it's important to "be greedy only when others are fearful," as Warren Buffett famously put it -- remaining on the lookout for great investment opportunities, particularly in disruptive businesses. The COVID-19 pandemic accelerated the adoption of some innovative services offered by businesses that existed before it happened and will continue to thrive long after it ends.
Opening positions in some of these companies could be a brilliant investing move. Take, for instance, telemedicine, which many patients turned to as the COVID-19 outbreak was unfolding; this technology allows professionals to provide consultations and referrals, and discuss medicines to prescribe, through videoconferencing.
The convenience of having a doctor (or nurse) available from the comfort of one's home 24/7 can hardly be overstated. No wonder, then, that data indicates that most people who have used telemedicine are likely to do so again. A Doctor.com poll found that 83% of patients say they are likely to use telemedicine even after the pandemic ends. And Grand View Research estimates that the market will be worth $155.1 billion by 2027, up from $41.4 billion in 2019.
To profit from this long-term opportunity, one of the best companies to invest in is Teladoc Health (TDOC -2.87%). The healthcare company has already managed to build a solid network of over 50,000 physicians worldwide and more than 450 subspecialties, giving it a leg up over many competitors.
Teladoc is building a competitive advantage in the form of its network effect (which is when the value of a service increases as more people use it). As the number of physicians and subspecialties on its platform grows, Teladoc will attract more clients, including both individuals and organizations -- such as health insurance companies -- that can offer telemedicine services to members, employees, or policyholders. And as the number of potential patients on Teladoc's platform grows, so will the number of physicians, in turn allowing for more patients.
Furthermore, Teladoc recently acquired Livongo Health in a cash-and-stock transaction valued at $18.5 billion; the deal closed on Oct. 30. Livongo Health offers various services to help those with chronic health conditions (particularly diabetes) to manage their illnesses. The combined entity has an addressable market of $121 billion in the U.S. alone.
Even when the market was performing poorly, Teladoc's stock soared, and it has jumped by 163.2% over the past 12 months. And given that it has barely begun to tap into its market, the future looks bright for Teladoc Health.
Never forget these timeless investment principles
2020 certainly tested the resolve of investors, and it showed us once again the importance of sticking with investing fundamentals. Regardless of market conditions, not letting emotions get in the way of your investment decisions, and looking out for innovative and disruptive businesses despite an economic downturn, can help you beat the market in the long run.