Since I last wrote in March when it was nearing a 10% correction, the stock market today is clearly in a correction. By some measures, it has been a bear market (with NASDAQ down more than 20% in early April, for instance). So what would an investor do today?
As in previous down markets, I started using my dry powder cash to buy stocks. This month has been busy for me, as you can imagine given the recent state of the markets.
In the past, I’ve waxed eloquently about my strategy of keeping cash for corrections and bear markets. I won’t belabor those arguments again. But here’s one aspect of this dry powder investing that I hadn’t covered before. I notice that the act of finding cheaper stocks and buying them with cash has some interesting salutary effects on me.
As I begin to deploy cash, I become more optimistic and energized. I stop fixating on previous portfolio highs (Oh, my portfolio was doing so well January, I should’ve sold more!) I become a bargain hunter (This company’s shares haven’t been this low since a long time!). I switch from lamenting on what could’ve been to the thrill of netting some bargains.
When markets are in fear and panic mode (Wall Street calls it the risk-off phase), we all need ways to cope with it. When the market was in the middle of a correction in 2019, I wrote in a blog post that we all could use a distraction to take our minds off it. [For context, see chart below for the 2019 market drop — it was a small blip] Late Al Frank had once suggested going to movies when the market is acting up. Jason Zweig recommends that investors create a John Candy moment for themselves when they feel overwhelmed.
My own way to cope with panicky markets has been to move my focus to my dry powder investing. As stocks go down below 10%, I become busy figuring out what to buy. This act of searching and buying makes me feel engaged and productive. I no longer feel helpless and beset with market tantrums. I stop regretting that I didn’t sell (more) when prices were high. I start looking forward to better prices tomorrow so I could use more of my dry powder.
A week ago, Aswath Damodaran, a well-known finance professor (and investor) at NYU published a blog post titled Buy the Dip: The Draws and Dangers of Contrarian Investing. In December 2023, I wrote about his preferred investing style (identify good companies and wait until their stocks go out of favor).
Prof Damodaran mentioned three key behavior traits that successful contrarian investors need:
- The Mindset: Those who are not easily swayed by peer pressure since they will have to buy when other investors would be selling
- The Time Horizon: One must be willing to wait for a long time since good bargains don’t come every year
- The Stomach: Without which investors will be prone to capitulate, second guess their buys as prices may continue to go down for an extended period
I agree with him. And I believe I do well on all three fronts. In my March blog post, I talked about the need to be skeptical of conventional wisdom. Of the rhetorics of the mainstream financial media.
We investors can do well if we learn to ignore media prognostications. We must remember that all widely discussed economic events are usually already priced in by the stock market. For instance, if a recession is widely expected, share prices already reflect its likelihood. We might as well stay patient and ride out the period.
Damodaran went on to describe how he takes advantage of turbulent periods. He initiated limit buys on three companies that he liked to own (BYD, Mercado Libre and Palantir). One order kicked in on April 7th while he waits for the other two. He has time on his side. Good-till-canceled orders can stay active for up to 90 days.
I, on the other hand, don’t use limit orders. But I also keep a wish list of stocks that I like to buy someday (either for the first time or just to accumulate more). My dry powder purchases kicked off as the S&P 500 dropped 10% in March. My first buy was made on March 11th. But then I had to wait until April 3rd to earnestly start my buying spree. So far, I was able to spend about 17% of my dry powder reserves. See this table for details.
Stocks have recovered some lost ground since the first week of April. My purchases show 10% gain so far. I don’t know where the market is headed next, but I echo Prof. Damodaran’s parting thoughts from the blog post:
The Crisis is young and the order is good until canceled!
He and I are both expecting more turbulence, and as a result more opportunities for us to snag some bargains. Let’s see how the rest of the year unfolds.
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