What level of risk are you willing to take?

Warren Buffett once said “Be fearful when others are greedy and greedy when others are fearful”. Another anecdote from the last recession was that when the strippers in Las Vegas start talking to you about their stock portfolio, it’s time to get out.

Coronavirus Hit Companies

We have seen investors buying up stock of companies hit badly, hoping to buy at a bargin. We have seen stock prices in industries such as airlines, cruise companies and oil all surging in the last few months. One of the biggest surges was in the car hire company Hertz, which filed for bankruptcy last month. With the drop off in travelling, the weren’t renting cars and they couldn’t pay the leases on all the cars in their fleet. So lets look at the daily return of their share price over a 5 day period last week:






If you invested $100, it would have fallen to $54 before growing to $365 in the space of 5 days!

And that’s not the end of it. The spike in their share price now sees the company looking to sell up to $1 billion in shares. They are a bankrupt company! There is a clear risk that the value of these shares could be worth $0 very soon!!

People are looking to make money fast on these stocks and are willing to lose everything in return for big returns (you’ll find that a lot of Hertz investors don’t know they are investing in a bankrupt company). This is nothing more than speculation with big risk and big rewards.

What about the rest of the stock market?

Since the initial violent shock when everywhere started closing down, we have seen the MSCI World Index grow by 35% after its fall of -33%, while the S&P 500 grew by 39%.

We are not seeing the fear that there was in the last recession. Traditionally investors left the market in times of uncertainty and looming recession. This time they are piling into the market.

A positive jobs report last week, egged on by president Trump who predicted a V type recover saw markets rally. This was brought back down to earth on Wednesday when the Head of the Federal Reserve, Jerome Powell said “there is great uncertainty” and unknowns with millions of people remaining out of work as a result of the coronavirus.

Investing in a diversified index or portfolio is far different than taking a chance on an airlines EFT. You are investing across the market and getting exposure to a range of different companies and largely investing in quality companies.

What about those sitting in cash?

This is why trying to time the market is so difficult. You already took the decision to get out. Now you have to make another decision on when to get back in. No one rings a bell when markets hit the bottom and tells you to get back in.

Up until Jay Powell gave his speech, it looked like markets had recovered, not it is not so clear. So you have to weigh up the risks. Stay in cash but miss out on returns if the markets continue to grow? Or go back in and run the risk of markets falling again and your money being worth less? This is investing and that is why you make money by investing in stock. The uncertainty. How much do you want?

If you have any questions, drop me an email at steven@bluewaterfp.ie