It seems that almost every day, there's more bad economic news. Unfortunately, it doesn't look as if the situation is going to get any better anytime soon.
The global economy remains locked down as policymakers around the world try to fight the outbreak of the novel coronavirus (Covid-19). Additionally, policymakers seem to be divided on the best way to eventually break the lockdown.
However, despite this backdrop of bad news and uncertainty, stock markets around the world are rallying. It is difficult to understand why markets are rising when the bad news keeps coming. Consensus estimates seem to agree that this rally will be short-lived. Almost every Wall Street commentator and economist believes that the stock market will retest its recent lows over the next few months as the global economy falls into a recession or possibly a depression.
If this is the case, why do stock markets keep pushing higher, and what should investors do about it?
There is no sense trying to fight the market. Betting against a rising market can be a ruinous course of action. The market can remain irrational for longer than most investors can stay solvent.
Howard Marks (Trades, Portfolio) has put out some interesting thoughts on this topic over the past few weeks. He's tried to make it clear that while the market could head lower, it could also move higher. We don't know what the future holds for the stock market, so there's no point in trying to predict the unknowable.
Instead, Marks has recommended buying stocks when they get to attractive prices and leaving the rest to the market. Here's what the seasoned value investor wrote in his most recent memo to clients of Oaktree Capital on April 6:
"The old saying goes, "The perfect is the enemy of the good." Likewise, waiting for the bottom can keep investors from making good purchases. The investor's goal should be to make a large number of good buys, not just a few perfect ones. Think about your normal behavior. Before every purchase, do you insist on being sure the thing in question will never be available lower? That is, that you're buying at the bottom? I doubt it. You probably buy because you think you're getting a good asset at an attractive price. Isn't that enough? And I trust you sell because you think the selling price is adequate or more, not because you're convinced the price can never go higher. To insist on buying only at bottoms and selling only at tops would be paralyzing.
...
So it's my view that waiting for the bottom is folly. What, then, should be the investor's criteria? The answer's simple: if something's cheap – based on the relationship between price and intrinsic value – you should buy, and if it cheapens further, you should buy more."
As investors, there are only two things we can control: costs and the price paid. The rest is up to the market. It is pointless trying to time the market and bet against the market when market movements do not make sense.
As long as we are patient enough to wait for the right opportunity to buy a stock, we should be rewarded handsomely over the long run, assuming the business survives and is able to generate a consistently good return.
Disclosure: The author owns no share mentioned.
Read more here:
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