What a week for the market indexes! The S&P 500 index (SPX) lost 4.78% this week and the Dow Jones Industrial Average (DJIA) lost 5.55%. On Thursday, the Dow fell by 1862 points for a 6.9% loss. It regained some of the losses on Friday. Investors are fearing another wave of Covid cases which caused the market jitters.
Federal Reserve president Jerome Powell painted a grim picture of the economy when he spoke this week saying the jobs recovery may take years. Of the nearly 20 million jobs lost, he said it was possible that millions of people wouldn’t go back to their old job or their prior industry. The Fed has purchased more than $2 trillion in Treasury and mortgage securities since the pandemic began. They also lowered the interest rates to near Zero.
Oil was almost stable this week at $39.14 per barrel.
Gold price rose this week by 2.66% to settle at $1,730.19 per ounce.
Why is the market so volatile? This can be explained by the entry of the retail investors (speculators) on the scene. The major online brokers (Charles Schwab, TD Ameritrade, Etrade and Robinhood), saw new accounts grow as much as 170% in the first quarter. Millennials who were getting bored sitting at home during the pandemic have entered full force in the market.
These newbies are piling into the airlines and cruise stocks which have been beaten down. Warren Buffet had sold all his stake in the airlines stating that the industry has a very dull prospect in the years ahead. But the airline’s stocks have rebounded, rising as much as 3 times their March lows. President Trump also stated that Buffet had made a mistake by selling his airline’s stake.
Another favorite is bankruptcy stocks. The car rental company Hertz is filing for bankruptcy. The legendary investor Carl Icahn sold his entire stake for 72 cents a share. The stock rose to $5.54 a share on Monday.
Barstool Sports is a popular and controversial sports publisher. It was founded in 2003 and was sold to Penn National gaming, which is a sports gambling operator, for $450 million. Its founder is David Portnoy. Since the sports events have ended due to the pandemic, there is no more betting happening in the sports. He deposited $3 million of his money into an ETrade account and started day trading stocks. He also live streams his trades with expletive commentary on losses. He confessed he knows zero about stocks. He invested $2 million in an AI stock. When the CEO of the company called David to explain what his company is doing, while on the phone, he sold his entire stake. So much for entertainment!
What does this bode for long time investors? Joe Kennedy was a famous rich guy of his age. Once he was getting his shoes polished and the shoeshine boy gave him some stock tips. He went to the office and sold his entire stake of stocks. Another legendary investor sold his entire stake when a cab driver told him to purchase Cisco systems stocks. This was during the heights of the dot com bubble. When you start receiving stock tips from main street, understand that the market is in a frenzy.
Surviving in the market for a period of 30 to 40 years is the name of the game. For this to happen, the focus should be on not losing money. Returns will take care of themselves if the principal is not lost. That is why, Buffet says the Rule number 1 is “Do not lose money” and the Rule number 2 is “Do not forget rule number 1”!
What is happening in the market today is not investing but gambling. This can be likened to a game of musical chairs. The show goes on, but when the music stops, that is when the losers get separated. Same way, no one knows when the party ends. So instead of feeling missed out because your colleague or friend has made pots of money in the market, work on developing a strategy that you could employ for the long term. This should be an intelligent framework with which you could pick great businesses and stay the course for the long run.