Be brave enough to invest against the herd: bargains abound – The Wall Street Journal

Warren Buffett, one of the world's greatest ever investors, admits that the one-two punch of coronavirus and plummeting oil prices on world markets has been ugly, but, he reckons, it is not quite as bad as the shock of the 2008 financial crisis. It's still early days to assess the likely economic impact of coronavirus lockdowns on countries but so far it's looking like many companies may not survive prolonged disruption to business. Those that are likely to, meanwhile, have lost value on stock markets. That in turn means there are some opportunities for investors, like Buffett, with a longer term investment horizon. As The Wall Street Journal says, take a deep breath and decide whether it is time to buy. And, know that you'll have to be brave as the financial markets weather more volatility through what are looking like very troubled times. – Jackie Cameron.___STEADY_PAYWALL___.Take a deep breath and assess whether it is time to buy.By James Mackintosh(The Wall Street Journal) – Wall Street reports have a tendency toward the melodramatic, but this week the emotional language was justified: markets really did crash. Stocks had two of their biggest one-day falls in history, and a four-day loss that ranks as the third biggest since 1964, behind only 1987 and the 2008 failure of Lehman. Deep concern about the coronavirus turned into sheer terror in a way that few watching will quickly forget.These are the moments smart investors are supposed to prepare for, to be ready to snap up bargains from others desperate to flee the market at any price. Investors with the strength of will to ignore the volatility need only find assets where they are confident that there is little risk of permanent loss to make money in the long run.Assessing that risk of permanent loss needs three big judgments.The first is political. Will governments provide sufficient support to keep the economy going through what could be months of lockdowns, travel bans and self-isolation? Central bank action isn't enough: investors want to see serious government spending, not just cheap money.Governments are acting. Australia is making no-strings handouts to pensioners and small businesses. Hong Kong promised a payout to every citizen this summer. The UK is planning a spending spree, France says it will shield workers and companies, and even Germany says it will put its short arms into its deep pockets.President Trump declared a state of emergency on Friday, and announced the purchase of oil for the strategic reserve, helping stocks and oil rebound. But actual money has mostly yet to arrive, while US politicians are fighting both about how much to spend on stimulus and how to spend it.As Dennis DeBusschere, head of portfolio strategy at Evercore ISI, put it: "Investors are less likely to panic if the Federal government is panicking." The message from the White House has been that everything's just fine, which isn't what the market wants to hear.Politics affects individual companies when the economy gets really bad. Who will get bailed out? In 2009 it was the banks and the car makers, but only after shares were crushed. Partisanship is even more extreme today, and likely to interfere with government rescues. Talk from the White House earlier this week about support for the stricken shale-oil drillers has already prompted outrage from Democrats focused on helping low-wage workers. Investors should be humble about their ability to predict which companies the government will save.The second judgment is on the financial system: will it come unglued, and create problems in the real economy?Cracks appeared in the financial system in the middle of the week as the market falls began to feed on themselves. Treasury prices went haywire, with very similar bonds moving quite differently on Thursday. A scramble for dollars pushed up the cost of hedging as banks chose not to supply the dollars demanded. The biggest exchange-traded funds owning US corporate bonds and long-dated Treasurys also fell to huge discounts to the value of the bonds they own, as the price of the funds plunged far more than the hard-to-trade underlying bond market.The problems showed that banks and hedge funds who usually try to profit from such dislocations were unwilling or unable to trade, suggesting deeper problems.But central banks are ready to help, and aware that they made a mistake by allowing Lehman to fail in 2008. The Federal Reserve made $1.5trn of short-term financing available, and central banks elsewhere have been supportive. I expect the Fed to activate global swap lines again to lend dollars to other countries, to ensure no shortages of the greenback.The banks are also in much better shape than they were, making a financial crisis less likely – although vulnerabilities remain, especially in the highly-leveraged corporate sector and among indebted emerging market companies.ETF BreakdownThe price of the biggest bond exchange-traded fund, the iShares Core US AggregateBond ETF, plunged far below the value of its holdings, as did several others.Put together the political and financial judgments and you can decide where you stand in the LUV debate: will the shape of the recovery be like an L, U or V? Government support and a limited spread of the virus leading to a V-shaped rebound would make plenty of assets look cheap right now.I expect longer-lasting economic effects as layoffs and lost opportunities leave a post-viral gloom on the economy, making a U with an extended low more likely, even as governments are eventually forced to respond in size.The third judgment: Can companies survive even without help?Will an individual company or industry, say, like airlines, survive months of customer caution, closed borders, absent staff and government restrictions on doing business?What is important is having enough cash to avoid going bust before the economy rebounds, and to cover a period in case a recession is deep enough to feed on itself. Chuck out earnings forecasts, and look at debt costs, wages, and access to credit lines. Strong balance sheets mean survival, which is vital to avoid permanent loss.Then there is the question of timing. Long term investors should forget it, and just buy where they think they can avoid permanent loss. But if stocks have a decent chance of falling another 20% or 30%, most would choose to wait.There is no real precedent for the economic or financial impacts of Covid-19, because governments haven't responded so severely to any past pandemic. But comparisons to past recessions offer some guidance. The 27% fall in the S&P 500 from its peak, before Friday's stunning rebound, is much smaller than in four of the last seven recessions. It is about the same as the 1982 recession, and already bigger than the limited drops in 1980 and 1990. When stocks are expensive, as they were a month ago, they could be expected to drop more, as the dot-com crash showed.On the plus side, governments can more easily spend money to deal with what a temporary virus shock than they can for an ordinary business-cycle recession, so perhaps the economic damage will be contained.Finally, when assessing stocks we should also turn the question around: What about the alternatives? Bond yields have collapsed this year as bond prices soared. Those who bought safe-haven Treasurys amid Monday's stock market rout have lost money. The gold price has dropped for four days in a row and is almost back down to where it started the year.The most extreme haven asset is the longest bond issued by the government of Austria, which pays no income and matures in 99 years. That makes its price supersensitive to moves in yields. At its top on Monday its soaring price had delivered owners a 142% gain this year, showing the power of long-duration safe bonds. Yet by last night its price was down by a quarter from Monday's peak, far worse even than the loss on European stocks over the same period.Selling safe-haven assets and risky assets at the same time, as we saw this week, is a classic sign of investor capitulation. It shows a rush into the ultimate safety of cash as fear overwhelms any prospect of return. Anything that can be sold, is sold.Unfortunately that doesn't guarantee prices can't fall even further, as dead cat bounces in stocks have shown in the past weeks, repeating the rip-your-face-off rallies that interspersed the drops of 2008-09.Still, stocks have now fallen a very long way, very quickly. It is a great time to be looking for bargains – but only for those willing and able to hold on through what could be some very troubled times.Write to James Mackintosh at James.Mackintosh@wsj.com

Be brave enough to invest against the herd: bargains abound – The Wall Street Journal

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