My 3 Thoughts on Yesterday’s Deepest US Market Decline Since June
4 September 2020
Yesterday (3 September 2020), the US market had its deepest one day decline since June.
The S&P 500 and Nasdaq had their deepest declines since June 11 and for Dow, it was their biggest decline since June 26.
Here Are My 3 Thoughts on Yesterday’s Deepest US Market Decline Since June:
1. The Market Is Unpredictable
If there is one thing that I have learned through my experience in the stock market is that the short term market movement is unpredictable.
The longer-term market movement, however, is more predictable, provided one does not pay an exorbitant price to participate in it.
So I have always gotten my gains not for from predicting the short-term market movements, but from betting on the long-term direction of the business.
2. We Only Know Who Is Swimming Naked When The Tide Runs Out
Two of the human biggest enemy in investing is greed and fear.
In this Bloomberg article that was just published today titled “Day Trader Options Frenzy Turns Ugly in $730 Billion Nasdaq Rout”, it mentioned the unexpected movement of the market likely resulted in many short-dated calls going bust.
“A call with a $125 strike price on Apple Inc. shares, expiring tomorrow, plunged 89% as shares sank 8% to $121. A bullish wager for Tesla Inc. to reach $500 by Friday’s expiry lost 90% as the stock dropped 9% to $407. And a call on Zoom Video Communications Inc. with a strike price of $420 became essentially worthless as shares hit $381.”
It is just one example of how potentially an unexpected movement in the market – in the short term – can blow up in someone’s face.
Primarily because in my view, these are gamblers, not investors.
3. Valuation Matters
Ultimately, valuation matters.
How I reduce my downside risks in investing is that I only invest in things that offer a margin of safety.
Meaning I try not to overpay.
Be it growth stocks or not.
Especially not after it has run up too much and the valuation starts to not be mouthwatering, investment-wise.
For example, I think Apple and Tesla already have such a huge run-up – so it makes sense that yesterday, those two fell 8.01% and 9.02% respectively.
I do not have those two stocks – but I have Facebook, and it did not fell as much – just 3.76%.
My other bigger position – which I have been in from a few months ago – Carnival Corp, is actually up 5.21% yesterday.
I think valuation should form a cornerstone of every investor’s decision of what to invest and when to buy, hold, or sell their stocks.
Without understanding valuations and investor’s mentality, we are blind.
I understand that for certain amazing companies, there will be a premium that has to be considered to be paid to participate in their growth. But I am always cautious as to what is a reasonable price to pay for that premium.
Remember, to finish first, we must first finish.
Yesterday’s minor stock market decline is just a reminder for us to stay rational in our investment journey.
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Disclosure: I am/we are long on Facebook and Carnival Corp.
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