The coronavirus that originated in China has now spread to more than 60 countries. To date, the outbreak is responsible for 110,000 confirmed cases and more than 4,000 deaths worldwide. As the fear of the coronavirus grows, nervous investors have been dumping stocks indiscriminately and seeking refuge in traditional safe havens such as bonds, gold or cash. If you have any money invested in the stock markets, whether through your retirement plans or a taxable account, you probably are wondering if you should just sell all your investments now and hide in a pile of cash (it will be a smaller pile).
Consider this before making any emotional decisions: Warren Buffett, the Oracle of Omaha and one of the greatest investors who ever lived famously said "be fearful when others are greedy; be greedy when others are fearful." One of the cardinal sins of average investors is the herd mentality. Like a sheep, many investors buy or sell assets not based on any sound analysis but only because they think everyone else is doing the same and they don't want to miss the opportunity. They often end up "buying high and selling low," which is the opposite of a sound investment strategy.
Buffett reminds us that it pays to be a contrarian when it comes to investing in stock markets because the price you pay for an asset and the real value you get will determine your return on investment. That's why you want to "buy low and sell high." When others are greedy and think the good times will never end, assets tend to be overvalued. If you join the crowd right then, you will likely overpay for an asset and the high price you paid will lead to lackluster returns. So when everyone else is greedy and thinks the party will go on forever, it pays to be cautious and wait.
When others are fearful, like what we are experiencing now, and when most investors are heading for the exits at the same time, the assets are undervalued. If you join the herd, you will turn a paper loss into a permanent loss. Recent market selloffs may present a good buying opportunity. Chicago billionaire Sam Zell told CNBC “Squawk Box” hosts last Thursday that while other people were selling, he has made investments in several beaten-down energy companies.
The energy sector is one of the hardest hit sectors in recent stock market selloffs, down 24 percent this year as investors fear that a global recession will reduce demand for energy. Zell found the stocks of some of the really good companies in this sector are simply too cheap to pass on. Of course, as a billionaire, Zell can afford to be wrong.
Zell's buying is more than bargain hunting. It reflects his confidence in both the future outlook and the strength of the underlying economy. I share his optimism because I see a number of silver linings on the horizon. First, even though there are scores of unknowns about this coronavirus, we have dealt with similar circumstances before.
The first case of SARS appeared in China's Guangdong province in November 2002. The Chinese government waited until February 11, 2003 to inform the World Health Organization (WHO) about the virus. By then, China had 300 confirmed cases and 5 deaths. WHO issued a global alert on March 12. SARS had spread to 26 countries, with a final count of 8,098 reported cases and 774 deaths. By July 5th, WHO declared a worldwide containment of SARS.
Covid-19 has infected more people than SARS but its fatality rate is about 3.4 percent, way lower than SARS’ 9.56 percent. Based on our experience with SARS, it is reasonable to expect Covid-19 to be contained this summer too.
Second, key US economic data demonstrates that before American consumers and businesses became overly fearful of the coronavirus outbreak, the US economy has been growing at a healthy pace. Last month, the Institute for Supply Management (ISM)'s non-manufacturing activity index reached its highest level since February 2019, to 57.3 percent. Any number above 50 means the services sector, which represents more than two-thirds of the US economy, is expanding.
The strong economic growth was further validated by last Friday's US job report. About 273,000 new jobs were added in the month of February, which pushed the US unemployment rate down to 3.5 percent, a 50-year low. Since the fundamentals of the current US economy are on a solid footing, I expect it will resume its growth once the fear of the coronavirus is subdued by this summer or even sooner.
Third, more economic stimulus is on the way. The US Federal Reserve cut its main interest rate by half a percentage point last week, its first emergency rate cut since the 2008 economic crisis. The stock markets expect more Fed rate cuts in the near future and other central banks to follow their lead.
The Trump administration is considering offering a stimulus plan, which focuses on helping sectors most affected by the coronavirus panic, such as the transportation and travel industries. Although financial and fiscal stimulus won't get rid of the virus, they will help American workers and businesses withstand the economic impact of the virus and help the economy to bounce back as soon as the virus is contained.
All of these factors have given me hope that we will get through the current virus induced panic relatively quickly. So if you are young and you have cash set aside which you won't need for the next 10 years or more, you may want to heed the investment advice from Warren Buffett, "Be greedy when others are fearful" and take the current stock market selloff as a buying opportunity to invest in good companies that provide goods and services people will need or want for a long time to come.