Investing lessons to learn from the Covid-19 coronavirus pandemic

The past 2 months or so has been quite punitive for stock investors and traders alike. Despite a few early cases of Covid-19, the month of February had been almost a non-event. The STI, despite sinking gradually, continued to stay above the 3,000 mark. Many market players took this gradual drop as an opportunity to load up stocks at a more decent price. The yield based on past dividend distributions was extremely attractive as stock prices fall. Local bank yields were heading towards 6% mark, an unthinkable number for the past 10 years or so. Until recently, despite rising dividends in the past 10 years or so, stock prices of banks have been correspondingly rising, resulting in bank yield falling in the range of about 3.5% to 4.5%. 

That changed altogether in the next two to three weeks when the market slide from the close of 3011.08 on 28 February to 2233.48 at close on 23 March 2020, a retreat of 25% in less than 3 weeks. That had caught many people off guard. Many had been buying in the month of February, in hope, either to get better yield for their stocks or to average down their purchase price after having bought some stocks at high prices. The REITs have it worse. Retail REITs like CapitalandMall Trust sank more than 40% from the high of $2.61 per share to $1.52 before making back to $1.85 level after MAS threw a few lifelines for REITs last week. The drastic change in the last three weeks had caused some distress among many market players. The whole global economic picture changed from a very optimistic state to be very pessimistic one as the world realized that the coronavirus pandemic is not just a passing one, but a much longer one causing many countries to be in a state of a lockdown or near to one.

The next three weeks since the last week of February to mid-March seemed to be better as many governments dipped into their pockets to help save their economies as a result of the lockdown. Since then, stocks have recovered about 50% from the steep fall.

Within a short span of just one quarter, the Covid-19 had already surfaced out several common investing mistakes.

  • The chase for yield can end up quite miserably. The hope to get high dividend can result in steep falls in stock prices during trying times, thus negating several rounds of future dividends. In fact, with the possibility of reducing dividends in future, this could push the ‘break-even’ point further down the road. This is not the only situation and certainly not going to be the last. The oil price crash in 2016 had put many bond-holders realized the heavy price to pay for the capital loss in bond prices. The recent Hyflux saga was the other one. These are the two recent examples that punished investors badly when we focus too much on yields. For a long time, this has been a learning point for me. It can come in many forms. On the whole, I realized that upside is more important than yield when looking for good investments. It gives us the margin of safety as an economic moat to ensure that we are still in the money even if the stock price weakens. Good yields will naturally follow when the fundamentals of our stocks gain traction.    
  •  REITS have been an income instrument for many people. REITs prices have been chased up and then slammed down about 30% in the midst of the crisis. The rebates that have to be doled out to retain tenancies would mean that investors are not going to enjoy the same returns like in the previous years. In fact, SPH REIT has already fired the first salvo to cut the DPU payout by78.7% to 0.3 cents per unit for Q2 in FY2020. Some other REITs are likely to follow suit to avoid cash calls that they need badly at this time. It has been lucky that MAS threw a few lifelines to save the situation last week. The has helped to push up REIT prices somewhat. The short-term effect for retail investors, however, is the reduced DPUs in the coming quarters. This certainly is going to be an extremely difficult time if one were to hold a huge portfolio of REITs.         
  • Let’s face it. We never like to lose. Even when our stocks are declining, we think of ways how to win back. We cannot control the on-going stock prices, so what we try to do is to average down. But averaging down in a down market is bad strategy unless we are very sure of a turnaround. The worst thing is when we are averaging at the beginning phase of the down market. This is a very common problem, especially when an investor believes that he has sufficient fire-power to overcome the price decline. Before we know it, we have parted our liquidity and, certainly, the confidence that goes along with it. Assuming if an investor has a portfolio of worth $200,000 and cash of another $100,000. For simplicity, let’s say the whole portfolio is made up of only DBS shares at an average price of $25. This means that he has a total of 8,000 DBS shares at the start. If he were to buy 1,000 shares for every decline of $1, he would have accumulated 12,000 shares at an average price of $24.17 when he expended nearly all his cash. Unfortunately, the on-going share price is at $21 which is way below his average price. In the recent decline, DBS stock price had actually gone below $17, which is a 30% down from his average price. It is extremely daunting in such a circumstance. That said, it is also unwise not to buy stocks when their value emerged. Remember, during a stock avalanche, good stocks and bad stocks get thrown out as fund managers need to maintain liquidity. So, the best policy is to space out our purchases, buying in small quantities. To stifle my itchy fingers in this circuit breaker period, I embarked on a project that I never had a chance to embark on during other times. This was the result of the project. I believe only a segment of the population knows about this historical monument.

 Happy Investing!

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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