How to invest during Covid-19

Anything can happen in the markets. Events that historically took many months or years to unfold happened in weeks in 2020. The S&P 500 declined by 30% in a record 22 days. The only event that surprised investors more was the recovery. The S&P recovered to its 2020 starting point within months.

Yet many households could not afford rent and mortgage payments in July, and millions are out of work. Consumer spending, the engine of growth in the United States, is likely to stall. How is the market not at lower levels?

These are confusing times. I attempt to offer a few guidelines, as a response to the barrage of questions received.

To start, nobody knows what the market is going to do.

Warren Buffett frequently says the same. So does Seth Klarman. Perhaps Matthew McConaughey says it best in the movie Wolf of Wall Street:

“Number 1 rule of Wall Street. Nobody … I don’t care if you’re Warren Buffett or Jimmy Buffett … Nobody knows if the stock is going to go up, down, sideways, or in f****** circles” (scroll to 1:48 in this clip)

How are you suppose to invest not knowing where the market is going?

There are 4 things to do:

1. Believe in the long-term potential of the American economic expansion

Earlier in March 2020, I wrote:

“Stocks reflect the long-term earnings potential of their underlying businesses. The American economy is contracting because of necessary measures to contain the virus, but the long-term potential of the American economic expansion is intact. In the past 100 years, America, backed by relentless dynamism, has survived a flu epidemic; the Great Depression; costly World Wars and numerous conflicts; an assassination and a resignation of her Presidents; hyperinflation and oil shock; Black Monday; savings-and-loans implosion; September 11; the dot-com crash; defaults of major economies; the Lehman and mortgage crisis; and the Eurozone sovereign crisis. Yet the S&P 500 increased from 18 to 3,231. There is little doubt that major corporations in the United States would set record earnings 10, 20 and 30 years from today.”

2. Invest in passive index funds

For the 99% of readers who believe in #1, you should invest in index funds designed to mirror the broad economic performance of the United States***.

3. Have a long-term orientation

Not a day, a month, or even a year. Years. Decades is even better.

Compounding takes time. Decent returns take time. Give your investing the time it needs.

4. Do not use excessive leverage

There are bold investors. There are old investors. There are no bold and old investors.

To have decent returns, the investor must first survive.

Leverage increases both returns and losses. What is the point of having 10 years of fantastic returns before losing it all in the 11th year? Some funds did exactly that.

The guidelines above are easy to follow, only if you live in a world without Wall Street and the media.

In recent memory, Morgan Housel perhaps summarized the challenge best:

“Investing isn’t an IQ test; it’s a test of character.”

The conviction to follow simple rules in investing for decades, without undue influence from family/friends/CNBC/Wall Street/that smart analyst, is extremely rare.

***The remaining 1% may attempt to invest in active managers such as myself. However, it is a wild ride for the uninitiated. Most of my peers under-perform passive benchmarks.