Coronavirus: Opportunities on the stock market
Aktualisiert: 24. März 2020
The coronavirus has had a significant impact on our everyday life: Closing state borders, canceling events, hamster shopping in supermarkets, curfews. We are also experiencing an economic recession, which is reflected in the stock market. Within the last 4 weeks (as of 16.03.2020) the S&P500 has fallen by 35 %. Welcome to the crash.
As always, most investors will succumb to their fear and herd instinct, sell everything and hope for better times. But if you invest smartly, understand the stock market and you are not afraid of calculated risks, then you had already built up cash reserves to be prepared for exactly this moment.
Let us put aside all worries about the medical and social consequences and concentrate on rational thinking again. Let's look at why Corona is a unique opportunity to multiply your wealth. In my explanations I mainly refer to the stock market experts Nassim Taleb and Andre Kostolany, who have achieved their fame by exploiting economic cycles.
Stock market crash of 2020
In early spring of 2020 we have experienced a so-called Black Swan, a very rare, unpredictable event with enormous consequences. This is reflected in the stock market: never before in its history, even during the last financial crisis (2008), has such a severe slump in the stock market been recorded in such a short time. On Black Thursday (12.03.2020), the S&P500 index fell by 10 % on this one day. Especially the oil industry, aircraft, hotel and event sectors are suffering from price declines of more than 50 % in total.
Does this mean that the individual industries or even the overall economy will change in the long term? Is this crash justified in its magnitude? Obviously: NOT!
Coronavirus: Effects on the Stock Market
The corona epidemic will bring about short-term changes in our everyday life. Since we can only work and consume to a limited extent, the virus will lead us into an economic recession. Especially smaller, highly indebted companies that are not prepared for such risks will disappear from the market.
Nevertheless, I doubt that the disease will cause a systematic change in the economy or society. There will be no fundamental change. It may even be that the panic will end in a few months' time, so everything will be back to normal.
Consequently, in the long term, corona is only an incidental noise, to which the masses exaggerate in the short term, but which will calm down again in the medium term.
An exaggerated reaction by the corona virus (see: Overreaction Bias) can be seen especially on the stock market: In addition to the weaker, fragile companies mentioned above, which are actually threatened by the crisis, long-standing, so-called anti-fragile companies have also been punished significantly. These companies are economically healthy, do not have too much debt and know how to deal with crises because they themselves have survived various emergencies. The Corona crisis has also penalized these stable companies in such a way that they are economically downgraded by up to 5 years. This is as if all the technical and financial progress in the years 2016 to 2019 would fizzle out.
For the smart investor, this is the chance to enter the market at favourable prices in order to benefit from returns above 100%, as soon as the company has relaxed again.
Coronavirus: Anticyclical investment
The global economy has so far weathered every crisis and emerged stronger. If individual investors remain calm and rational, they can even profit from this situation. Let us take a look at the long-term performance of the global stock market in the form of the MSCI World Index:
The diagram shows the historical price trend of the stock market (blue line) with all its fluctuations. In particular, the crisis periods around 2000 (Internet bubble) and 2007 / 2008 (Financial Crisis) caused medium-term dampers in price development.
In the long term, however, a trend can be detected (see green dotted line), which forecasts not only linear but also exponential growth. Consequently, we assume that the market will recover after every emergency. We would profit mostly from investing anti-cyclically during the corona crisis. In other words, we enter the equity market when the peak of the crisis occurs. During this period, the lowest stock market prices are offered, i.e. where the best "bargains" on the market can be found. In the diagram above, for example, these are the years 2003 and 2009; presumably at the present time the first half of 2020.
However, we cannot predict in the future when prices will be at their lowest point, so we should strive to hit this low point only "roughly". In addition, we must always think long term and expect that a recovery in prices may take several years.
The Egg by Kostolany
Andre Kostolany, a stock market, became famous for his anti-cyclical investment model. Instead of following the herd, which only has the courage to invest when share prices rise, he did the opposite: During an economic recession he invested in cheap shares and profited from the later rising prices.
The Egg by Kostolany corresponds to an economic cycle with rising and falling prices. We just need to be able to roughly identify the right time to invest, which is the lower third of the egg. Of course, prices can still fall further, but nobody can predict that. It is best not to shoot all your powder at once and then find out that you are still in the Hold-Phase. Instead, take advantage of the cost-average effect and invest your available budget in tranches.
My personal example with the Shell share:
Shell, founded in 1907, is one of the largest oil and gas companies. Thanks to its long existence, Shell has sufficient experience and safeguards to master the crises of the cyclical oil business. This is demonstrated by the company's dividend, which has been rising steadily since 1945. At today's price, 18.03.2020, the share has fallen to around €10, which corresponds to a dividend yield of over 15%. In view of the high dividend and the fact that Shell still had a value of €29 per share in 2019, the potential share price target of €29, which should be achieved in the medium term, is also seen here. But even if the share price were to remain at the low level of the Corona Crisis, the investment would be returned within about 5 years through the dividend payments alone.
So how did I invest in the last weeks:
Shell has been on my watch list for a while, but it was still too expensive for me. When the share price dropped to about 15 € on 9 March, I saw the chance of a lucrative investment and invested my 1st tranche — let’s say it was 1,000 €. Only a few days later on Black Thursday the price fell further to about 13 € and the 2nd tranche (1.000 €) was invested. Again a week later the price fell to about 10 € and I invested my 3rd tranche. Even if Shell continues to fall, I would invest further tranches as long as I still have free budget for stock trading.
In this example I was able to get 67 (1st tranche) + 77 (2nd tranche) + 100 (3rd tranche) = 244 Shell shares at an average price of €12.67. When the economic recession recovers, the share price would probably reach €29 again, equivalent to a profit of 129%. My assets would increase from €3,000 to €6,870, plus dividend payments.
Important to note with this strategy: Don’t invest in just one share, so that you can spread the risk if, for example, one company is worse off than expected. Broadly diversified ETFs such as MSCI World or S&P500 would be more safe.
Coronavirus: Where can I trade stocks at a good price?
Due to the many interested parties, who either want to sell shares in panic or buy them for the first time, some securities traders have temporarily dropped out due to the high traffic. I use mainly German trading accounts because of the high trust. One that I can recommend for English speakers is the broker Flatex since they offer a good price and have been awarded as the best broker for several years. Here are some details:
ETF savings plan starting at 50 € per month
No extra fees for selected ETFs (this includes all relevant ETFs for a long term investor)
Only 0,1 % management fee per year
Order costs for individual stocks: 3,8 € (usually other broker ask for 5€ or more)
HERE you can open a free account at Flatex.
Coronavirus: Which stocks to buy now
Finally, I release here my list of investments already made during the Corona crisis, which are sorted by the level of risk:
IShares Core MSCI World ETF (highly diversified ETF, the “World Portfolio”)
IShares Core S&P500 ETF (ETF with the 500 largest listed companies in the USA)
IShares Core DAX ETF (ETF with the 30 largest listed companies in Germany)
IShares MDAX ETF (ETF with the following 50 largest listed companies in Germany, historically higher growth rates than the normal DAX ETF)
Berkshire Hathaway share (investment company of Warren Buffet, fallen by 25% so far due to the crisis)
McDonalds share (solidly positioned and long-standing company, fallen by 38% so far due to the crisis)
Walt Disney share (solidly positioned and long existing company, Netflix could lose its position in the future, the crisis has so far caused a 38% drop in value)
Airbus share (solidly positioned and long-established company, largest European aircraft manufacturer, quasi-monopoly position with Boeing, sharp drop of 60 % due to the corona crisis)
Shell share; WKN: A0D94M (see above)