The market recovered by over 1,100 points in May. While the Dow is still 4,000 points off the peak, we have gained back about 7,000 points from the low in March. Almost all of you made money this month and that recovery leads us to the topic of this newsletter.
The topic of this newsletter will be contrarianism. In short, it refers to the idea that the crowd that makes up stock market investors are often irrational. They are foolish when the news is dramatic and then overreact to news which drives stock prices too low or too high. Eventually, the stock prices will snap back to a normal level. The normal level is very subjective but can be approximated via valuation metrics, GDP growth, inflation, etc. Pop quiz, if the market plunges 50%, is that a time to buy to sell? We assert that it is a time to buy.
If you’re invested in a well-diversified domestic collection of stocks, then you are in essence invested in the US economy. Unless you think that COVID is going to permanently lower the US economy, eventually the US economy and the stock market will recover to its previous peak and exceed it. If you are concerned that COVID will permanently lower the economy, you shouldn’t be, we have recovered from many disasters in the past and this situation shouldn’t be any different. As we said in a previous newsletter, some industries will die, some industries will adapt, and some new industries will be created in the new world we are entering. Overall, we will be fine.
When the market started to plunge in February, our contrarianism made us think that eventually stock prices would snap back to normal. Of course, we did not know how long it would take to snap back. As long-term investors, we are willing to wait for our profits. Instead of seeing the plunge as a reason to panic, we saw it as an opportunity to grab a bargain. We rebalanced client portfolios during the plunge. We bought more mutual funds and stocks. Also, for their own portfolios, both Daniel and Eli invested heavily during this time. In the long run, we assert that the plunge is temporary, and the recovery supports our assertion. It is also very nice that this recovery is happening so quickly.
If you have any questions for us, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.
Daniel and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
If anything that we mentioned above interests you, please consider downloading my free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.
Questions for the comments
Did the newsletter make sense? Do you agree or disagree with what we said?