Finance 1. Good times don’t last forever... The first and most important lesson of the corona-crash is also the simplest to understand: when it comes to investing, good times don’t last forever. In hindsight, this seems obvious. But remember, until late February of this year, it had been fully 11 years since the North American stock markets had experienced any kind of significant correction. Sure, there were ups and downs along the way, and bumps and hiccups which took market indexes down a few hundred points and lasted for a few weeks before things got back to normal. Yet, the overall trend was up: during the 11 years that ended in March, the broad-based S&P 500 index (a good proxy for the U.S. stock market as a whole) returned a whopping 300%. And it seemed like there were very few reasons why the good times couldn’t just keep on rolling along. My, how times have changed. Starting in the last week of February, the U.S. stock market entered a bear market that saw it drop by 34% in slightly less than a month − the fastest 30% drop in history. Perhaps more significantly, the corona-crash saw the demise of several well-known companies around the world such as high-end fashion retailer Neimen Marcus, global car rental company Hertz and Australia’s second-largest airline, Virgin Australia. The lesson for investors: don’t be complacent about bull markets. The best time to prepare for a stock market downturn is when you’re enjoying the good times – because, if history is any guide, they won’t last forever. 2. ...but bad times don’t last forever, either. As difficult as the corona-crash has been, there has been a silver lining: it was over quickly. Since the market bottom on March 23, certain beaten-down sectors of the stock market were showing positive gains. And, within a month, almost every part of the market was on the road to recovery and some sectors (high-tech in particular) were pushing all-time highs once again. Of course, 2020 isn’t over yet. And it’s impossible to know for sure whether the strong recovery we’ve seen will “stick” (there are plenty of strong opinions on both sides of that argument). But whether the stock market is giving an all-clear signal or whether we’re in store for several more months of volatility, is almost beside the point; those who predicted the end of the world and sold all of their holdings have missed out on one of the strongest stock market recoveries the world has ever seen. Pardon us for repeating ourselves: the lesson for investors here is not to be complacent. The best time to prepare for a stock market upswing is when you’re still lamenting the bad times – because, if history is any guide, they won’t last forever. 3. “Black swans” happen The professionals call them “black swan” events: unpredictable, unforeseeable scenarios that lie outside of the normal range of possibilities or reasonable “what if ” planning. Much like finding a black swan swimming in a pond, such events are extremely rare, and next to impossible to predict. But they do happen. This is another lesson for investors. We’re pretty sure that by the time the current volatility is finally over, there will be books written by certain experts who foresaw the impact of coronavirus and made millions (billions?) because they got out of, or into the market at just the right time. But let’s be clear here: most of us weren’t able to do that. At the end of the day, even the experts can’t be 100% right about the stock market 100% of the time. The simple fact is that black swans do show up from time to time, and it’s darn-near impossible to predict exactly when, exactly where and exactly how long they’ll be around. The lesson is to remain humble, and understand that unpredictability and randomness remain inherent parts of investing, especially in the short term. Instead of expecting a slow, steady climb up, we should position our portfolios defensively and expect volatility to strike at the exact moment we don’t expect it. CSANews | SUMMER 2020 | 29
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