• Arne

Investing in times of crisis: Corona as an opportunity

Every crisis is an opportunity in disguise. For investors, it often appears in the form of low prices. There are a few things you should always bear in mind when selecting securities in such times.

Recently, I came across a lot of articles about how to take advantages of the current crisis. Unfortunately, most of them are poor. Some even claim to provide concrete investment advice such as "buy stocks of the healthcare industry, because Corona increases the demand". To me, anyone who yells out such general recommendation is either lacking fundamental knowledge or tries to sell you out to his own advantage. Of course, I am not denying that there is a possibility that some healthcare stocks might skyrocket, but there is also the chance of nosediving. The point is: you can never know with certainty. Never invest without doing your own analysis!

Don't assume yourself to be smarter than the market!

Keep in mind the Efficient Market Hypothesis, which assumes the market prices to be efficient by already reflecting all currently available information. Hence, all future price movements are just random walks caused by new information that pop up. In case you need a Nobel laureate in economics explaining this to you:

Contrary to this statement, there is a lot of evidence showing that markets are not efficient all the time. Actually, the whole investment industry relies on the assumption that markets are not fully efficient. Of course, no real investor would doubt it - myself included. Let us hear what Warren Buffett has to say about it:

However, unfortunately, security markets are indeed very efficient in most times. That being said, if you are a private investor (even if you are among the most skilled ones) you cannot outrun all professional investment firms out there. They have better resources and can act faster if reasonable new information about the business occurs. That is, they have already placed their orders and thus adjusted the current price. Thus, always consider:

"Never rely on any investment advice without running own investigations."

How can I take advantage out of the crisis?

As stated, I believe markets to be efficient at almost any point in time. That being so, there are, of course, some periods (especially during a crisis) where markets tend to overreact. This is shown by an excessive volatility. Even John Maynard Keynes stated:

"In abnormal times [...] the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation."

Thus, the good news is: there is a possibility to identify undervalued businesses. However, to be able to do so you would need to bring a lot of knowledge and resources to the field, which most private investors lack. This is something exclusive for the professional investor. Hence, my advise to the private investor is: either increase your skills to become a professional investor or stick to a broader index fund plan. On the other hand, my advice to the the professional investor is: stick to your circle of competency. Do not let your emotions take over. Be patient and start analyzing company's by its fundamentals, i.e., its ability to provide future cash flows to you.