The same but different

I enjoyed an excellent brunch yesterday at a cafe/bistro in Bath called Same, Same but Different. If you are in Bath, I can highly recommend it. It inspired this title above.

The current global stock market sell off is naturally being compared with the financial crisis of 2007/8. The aspect that is the same is that many stock valuations were at stretched levels being sustained by momentum buying and idiotic ‘expert’ comments suggesting valuations where no longer dependant on profits and dividends . Some bad news that people don’t fully understand is enough to knock over enough dominos at the end of the row and that triggers a collapse that just keeps going.

The aspect that is different is that in the main the extent of the financial fictions created ahead of the last crisis were understood quite quickly and in fact were in the past – the consequences were easily quantifiable (and awful). This time, people are actually anticipating most of the possible (maybe probable) implications of a widespread epidemic impacting the global economy. That has not actually happened yet and really we don’t know exactly what course the virus outbreak will take, nor the full impact.

That is not to say that the pace of the market sell off is in any way surprising or inappropriate. When share prices head up into the stratosphere, the fall back will always be more drastic and rapid because of the volume of high pressure ‘gas’ (fake valuations) built into the market balloon. A ballon burst by a pin deflates much the same as one burst by a flame thrower. The cause is largely irrelevant at this stage – the issue is one of human behaviour.

What to do?

The usual advice not too sell sell out of quality investments at silly prices remains as sound as ever. Hopefully my readers don’t have much money, if any, in fantasy land shares like Tesla or Netflix. So if you have a well thought out diversified portfolios and plenty of cash to meet your needs, sit tight – things will get better at some stage.

But what if you have surplus cash waiting on the sidelines? My view is that the as one cannot ever see the bottom of a market cycle in advance, it is best to wait until the underlying facts that caused the sell off change – ie the immediate trigger issue has been understood and will be worked around. That has not happened yet with Covid-19.

When markets start to pick up solidly, over consecutive days, because there is better news (maybe a vaccination or solid evidence of containment) and some rays of metaphorical sunshine, then the wise investor will start buying, but in a number of tranches to spread the short term timing risk that cannot be avoided.

What to buy might well be different to what might have looked right a few weeks back – seismic changes in the factors that influence investment selections are possible at times like this.