There's always a way to make money and 4 other things investors have learned during the crisis

Peter Hodson: 2020 has proved there is always an opportunity to profit, somewhere, if you stop and take a look

So, summer is largely over and the kids are (sort of) almost back to school. In a COVID-19/lockdown world, nothing is ‘normal’ anymore. Certainly not the stock market, which continues to defy gravity, and — according to some — sanity.

One thing I like about the stock market is that there is always something to learn. Even after thirty-plus years in the business, one can always discover new ideas and themes. Looking back at the past six months, let’s look at a few things investors may have discovered as the world dealt with the pandemic and its repercussions.

Business finds a way

Like Dr. Ian Malcolm’s famous quote in Jurassic Park, “Life, uh, finds a way,” it certainly seems like business has found a way. At one point in March/April, nearly every non-essential business in the world, was essentially closed. Yet, businesses and consumers found a way to keep operating, and keep spending. Sure, many businesses reported sales declines of 50 per cent, or more, in the second quarter. But the point is: Sales did not drop to zero. Businesses found a way to adapt. Some businesses thrived. Even a company such as Lightspeed POS (LSPD on the TSX), whose business is largely dependent on restaurants and hotels, managed to report far better results than anyone expected, as business simply ‘shifted’. The Darwinian-survival-adaptations of many businesses this year has been most impressive.
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Watch the VIX above all else

In February, many investors had never heard of the VIX volatility index. But in March, all that changed, as the VIX spiked to a record of 84, even higher than the levels of 2008. The VIX index confirmed to investors that, yes, things were very bad in the market, indeed. But, just like in the 2008/2009 crisis, the spike in the VIX corresponded very closely to the lows of the market, as “panic” peaked. It is not a perfect indicator but is a very good gauge as to what’s going on in the world. So, the next time you are thinking of selling into a panicked market, check the VIX first. Is it over 60? Maybe selling then is not the best strategy. Is it over 80? Well, maybe then it is time to buy, instead.

Greed is always present

Bull market or bear market, pandemic or no pandemic, there is always a core group of investors who, simply, get greedy over anything else. We have seen this in COVID-19 vaccine stocks, electric car manufacturers, Kodak, Hertz and countless other securities. Investors see a small stock moving, get dollar signs in their eyes, and start buying, most times hardly knowing what it is they are ‘investing’ in. Sometimes, this works out, for those with quick trading fingers. But most times, buying a bankrupt entity such as Hertz is not a good investment plan. Hertz stock, by the way, is down 97 per cent in one year, but up 79 per cent in three months, reflecting some of the recent speculative activity.

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Governments have learned from prior crisis events

Now, we are not usually one to praise governments, but we will give credit where credit is due. Both in the U.S. and Canada, governments very quickly responded to the COVID crisis. Sensing it was, hopefully, an event with a defined timeline, governments and central banks threw money at consumers and businesses. The plan was to ensure businesses and individuals could simply survive 2020. Yes, deficits have risen and future taxpayers are going to pay the price. But the alternative was a wave of bankruptcies which would have caused a domino effect — It simply would have been devastating. Sure, the stimulus is essentially kicking the can down the road, but at least there is still a road now. In prior crisis events, governments were too slow to react, and this made prior events worse than they should have been.

There is always a bull market somewhere

This is Jim Cramer’s quote, but was certainly exemplified in 2020. Yes, there was a pandemic and yes, things looked very bad in March. But ignoring the market and going to cash was clearly not the way to go. There were still sectors that boomed, whether it was work-at-home companies, cyber security stocks, or — surprise, the lumber market. There is always the possibility of making money. Turning off your screen or not opening your broker statements might spare you some short-term stress, but it is not going to make you any money. 2020 proved there is always an opportunity to profit, somewhere, if you stop and take a look.

Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals.
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