All it took was three trading sessions, and euphoria has turned into unease amid a September stock market crash that hit many of the first-half-of-the-year tech winners, including the likes of Shopify. Warren Buffett looks like a genius, having boosted his stakes in grocers and gold stock Barrick Gold while taking a raincheck on many frothy, pandemic-resilient tech stocks that, before September, had been defying the fundamental laws of gravity.
Today, the Nasdaq is in correction territory, and the S&P 500 isn’t too far behind. The TSX Index is back in correction territory, and memories of the February-March market crash are now fresh in the minds of many. The February-March 2020 market crash came with little warning. For the start of February, we were in a bit of a “Wile E. Coyote” kind of market.
Every sell-off is different, though, and while the insidious novel coronavirus is still lurking out there, I don’t think this recent pullback will be as bad as the one suffered several months ago. As I’d noted in my prior piece, this market crash round two seems to smell more like the correction of early 2018, where froth was taken right off the top of the hottest stocks that were melting up.
Indeed, round two of this 2020 market crash could be just as vicious as round one. But if you’re ready to roll with the punches, I think you can have a chance to profit profoundly on the mistakes of the many rookie investors out there that are now discovering that stocks don’t always go up. Undoubtedly, rookie mistakes, excess liquidity, and leverage are culprits for the last three days of selling hell.
While I’m all for de-risking and profit-taking, I think that the worst mistake a beginner investors could do is sell shares of a company they still believe in at a loss just because the momentum has vanished. If you’re chasing a stock just because of its momentum, you’re not investing. You’re speculating, and you could stand to lose your shirt if you don’t have a long-term thesis to fall back on.
In this type of choppy market, you need a sound long-term thesis so that you won’t follow the herd right off the edge of a cliff. There’s a difference between de-risking and re-balancing a portfolio and panic-selling. The former is always wise, regardless of the circumstances. However, many beginners learn the hard way by feeling the pain before they take steps to relieve pressures brought forth by an unbalanced, undiversified portfolio.
I’d imagine that many rookies were piling into tech stocks over the past few months. Many pandemic-resilient tech stocks were the only names that were proliferating through this pandemic, after all. Cut to September, and excessive greedy has turned into fear. And investors who went all-in on tech and growth are now feeling the full force of the recent market crash.
Fortunately, many rookie investors that are still sitting on significant tech gains have a chance to take some profits off the table. If you’ve doubled or tripled up in Shopify, it may be a wise idea to take your principal off the table and put money to work in a defensive position that your portfolio may lack.
Barrick Gold is an obvious top choice for investors who want to bring their portfolios into better balance. The recent Warren Buffett buy is one of few momentum plays that I think can still stay strong over the next year, as the price of admission into such an inflation (and volatility) hedge is likely to go up as uncertainties continue to weigh. Barrick is the gold standard as far as gold miners are concerned and if your portfolio’s beta needs to be brought down to Earth, you should seriously consider rotating some of your tech gains into gold if you’re underweight lowly correlated alternative assets.
Also, if you're interested in betting on potential multi-baggers, you may want to check out these small-cap stocks.
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