Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 355

Don’t fall under FOMO’s market spell

Fear of missing out (FOMO) may have some investors piling back into share markets. But if this bear market cycle plays out like those that have come before, long term investors can afford to wait, and patience is likely to be rewarded.

How bulls and bears behave

History shows that when bull markets start, they generally last a long time, much longer than the bear market that preceded them. As the chart below shows, even if investors bought into the last bear market three months after it bottomed, there were still handsome returns to be made over the decade that followed.

We have recently moved out of bear market territory, but it is early days yet. The chart below shows the S&P500 during the Covid-19 crisis overlayed with the GFC and gives an indication of how this could play out.

Volatility in bear markets bounces along the bottom – up and down from day-to-day - and we can expect volatility to continue for a while.

That said, there is a lot of opportunity to buy, and our portfolio is doing so – having gone from 20% to 60% invested. But we are prudent about being fully invested too soon, because bear markets generally drag on for a while.

The trick is to not give in to FOMO and to be patient, because the bull market will come back and ultimately there will be good times ahead again.

So when to return to markets?

There are many market timing indicators worth keeping track of, and we follow the VIX closely. A good time to go fully invested is generally when volatility passes. The VIX has been as high as 80 in this crisis and it has only been at 80 once before in my lifetime, which was during the GFC. Then, it took seven to eight months to fall back below 40, as the chart below shows.

Our view is to wait until volatility subsides, which means potentially giving up a bit of relative return in the short term. For absolute returns over the longer term, ultimately the next bull market will be like those that have come before and will be long and fruitful.

Where would we invest when the time is right? The bottom line is that earnings growth drives stock prices. We are focusing on companies that will be better off on the other side of this crisis. Some of them may take a hit this year, but we want to focus on those that will be better off over the next three to five years.

The three largest sectors we are exposed to are digital enterprise, e-commerce and digital payments.

We are particularly bullish on the digital enterprise sector. We were already positioned strongly in Microsoft, along with some other cloud and software companies, before these latest events. And if anything, the current crisis will only accelerate the move to cloud-based systems. Microsoft Teams is being used around the world, and most children are moving to online learning. This shift to the cloud and to software will accelerate.

E-commerce is another sector we like, for the same reasons. We’ve always followed the trend towards e-commence and if anything, this crisis means the shift will happen even faster than predicted. From that point of view, Amazon and Alibaba are two names that we like.

And while the digital payments sector will take a hit this year, because commerce is slower, ultimately the shift to digital will accelerate. We are positive on PayPal in this space.

Other sectors we like include digital advertising. While Google and Facebook will be impacted this year, we expect it to outperform over the long run.

In the same vein, healthcare companies and diagnostics are also well placed.

While value investors may find good opportunities in sectors such as energy, tourism and leisure and media companies, there will are also tough times ahead for financials, restaurants and franchise operations as well as automotive industries. Unfortunately, these are the ones to suffer most in this crisis because these are the sectors exposed to consumers and small-medium sized businesses.

There is no doubt that there are still tough times ahead for markets and economies, and there will be no avoiding a downturn. But history has shown that investors can afford to miss the absolute bottom of the market, and still make good market gains.

The bull market will return and when it does, it will last for a long time.

 

Nick Griffin is a Founding Partner and the Chief Investment Officer of Munro Partners. The information included in this article is provided for informational purposes only. Munro Partners do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions.

 

RELATED ARTICLES

Braving bear markets: 5 lessons from seasoned investors

A band-aid on a bullet wound

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

The best strategy to build income for life

Owning quality, dividend-producing industrial shares is key to building a decent income stream. Here is an update on the long-term performance of industrial stocks against indices, listed property, and term deposits.

Are more taxes on super on the cards?

The Government's broken promise on tax cuts has prompted speculation about other promises that it may consider breaking. It's widely believed that super is lightly taxed and a prime candidate for special attention.

Lessons from the battery metals bust

The crash in lithium and nickel prices has left companies scrambling to cut production, billionaires red-faced, and investors wondering how a ‘sure thing’ went so wrong. There are plenty of lessons for everyone.

Welcome to Firstlinks Edition 545 with weekend update

It’s troubling that practical skills like investing aren’t taught at schools as it leaves our children ill-equipped to build wealth, and more vulnerable to bad advice. Here are some suggestions to address the issue.

  • 1 February 2024

For the younger generation, we need to get real on tax

The distortions in our tax system have been ignored for too long, and we're now paying the price. It's time Australia got real and addressed the problems to prevent an even greater intergenerational tragedy.

Latest Updates

Shares

16 ASX stocks to buy and hold forever

In his recent shareholder letter, Warren Buffett mentions several stocks he expects Berkshire Hathaway will own indefinitely, including Occidental Petroleum. We look at ASX stocks that investors could buy and hold forever.

Investment strategies

Clime time: 10 charts on the outlook for major asset classes

The charts reveal that interest rates can't rise much further as Australian mortgage holders are under stress, bank dividends look solid, and the bond market is in flux because yields are being manipulated.

Strategy

Phasing out cheques, and what will happen to cash?

Cheques and bank service, or the lack of, were major topics when I addressed a seniors’ group recently. The word had got out that the government was phasing out cheques, and many in the audience were feeling abandoned.

Retirement

What financial risks do retirees face?

Treasury's consultation into the retirement phase of superannuation is generating a lot of interest. This submission to the consultation outlines the key financial risks to an individual’s standard of living in retirement.

Shares

Recession surprise may be in store for the US stock market

Markets are partying like it's 1999, but history suggests that US earnings and economic growth are vulnerable following an interest rate tightening cycle. Investors should prepare their portfolios accordingly.

Investment strategies

3 under the radar investment opportunities

The Magnificent Seven are hogging the headlines, yet there are plenty of growth opportunities elsewhere, at a fraction of the cost. Here are three stock ideas riding key areas of structural and cyclical change.

Shares

Why a quant approach can thrive in the age of passive investing

The rise of passive investing is unlikely to derail the value of quantitative strategies. Passive investing hasn’t eradicated the irrationality of crowds, leaving pockets of opportunity to outperform indices.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.