What has happened on the stock markets this week, both here on the ASX and on international markets, might trigger some rather unpleasant memories for investors who were around during the turmoil of the COVID-19 outbreak.
This comparison is hard to escape after Thursday morning saw the US markets record their worst one-day performance since June 2020.
This writer happened to be around and investing during those dark days. So, today, it seems pertinent to discuss some of the lessons that 2020 taught me about investing.
Investors all over the world are probably paralysed with fear and uncertainty right now. I won't sugar coat it. The tariffs that the Trump administration has just announced are worse than most commentators expected, and have a real chance of tipping the global economy into a downturn.
This has the potential to be a painful experience for the investor. Growth could slow, and unemployment could rise, both here and abroad.
In every recession, certainly back in the COVID days, quality companies survive. Although some businesses struggled during COVID, others made hay while the rain was pouring. Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) sales held up well, while we all rushed out to pay more for Netflix and Amazon subscriptions and Uber Eats deliveries.
In the years since the COVID recession, the winners have mostly kept on winning. These are the sorts of companies that you want in your share portfolios in my view.
It's understandable to hold off investing when there is uncertainty in the global economy. No one is certain of much right now. That makes it hard to part with the safety of cash in the bank.
However, it's these uncertain times that often produce the best opportunities to buy quality investments. As Warren Buffett once said:
During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases.
Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well
During the COVID crash of 2020, I spent a lot of money buying shares that had fallen significantly in value. It was not easy at the time, as I had no way of knowing whether the shares I was buying would fall by another 20% or 30%. But in hindsight, it's now obvious that these investing decisions were highly lucrative. Keep all of this in mind if the markets get worse in the coming weeks and months.
Finally, a caveat. The 2020 COVID crash was a scary event. But governments quickly assured us all that they were prepared to do unprecedented things to get us all through it. Although we had to endure lockdowns, we also all benefitted from stimulus payments, government guarantees and record levels of quantitative easing (QE). These safety nets were not present and available in previous recessions. And we shouldn't expect them to come back if there is a recession in 2025.
I don't expect governments around the world to turn the printing presses back on this year, at least to the extent they were churning out cash back in 2020. As such, there probably isn't going to be a rush of cash into the stock market, propping up 'meme stocks', NFTs and the other bubbles that we saw back in 2020 and 2021.
As such, I don't believe it would be prudent to rely on a 'Fed put' if things get worse. Just hold the fort with your high-quality businesses to ride it out, and if possible, channel Buffett and buy more.
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