Why I Have Been Buying More Stocks And Believing This Is A V-Shape Recovery

While the bears and bulls have been debating about which direction the stock market is heading, I have been buying stocks and even took on some leverage.

We should only give in to despair for a short while, beyond that, we should consider the possibility that things will get better over time.

Despite the chance that markets can get worse, there is room for cautious optimism. Here are some bright sparks I see:

#1 – Singapore is getting the infection numbers for locals and PRs under control

The situation does look bleak for dormitories in Singapore; the situation is improving for locals and PRs under the Circuit Breaker. Once we clear the local cases, we can focus our efforts on the dormitories, and I expect the coordinated effort of different Ministries to able to bring the numbers quickly after that.

(Note: There’s a remote possibility that the foreign workers may riot, reminiscent of what happened in Little India, and trigger a market collapse.)

#2 – Some COVID-19 patients are responding well to Remdesivir

Some leaks show that patients are responding well under Remdesivir, creating a possibility of a cure for COVID-19. We should, however, maintain our calm over this piece of news as trials are notoriously unpredictable, and there is still a decent chance that the drug will be proven ineffective during later tests.

(Note: In my opinion, if remdesivir fails in a future trial, it can be a catalyst for the W-shape theory to dominate as markets see another crash.)

#3 – Local markets have retraced more than 10% from the bottom

The STI peaked at around 3,407 in April 2019, and it crashed recently hitting a bottom of approximately 2,233. As of now, the STI has recovered more than 10%. If you define a 10% recovery as an end to the crash as I have done in my R programming code, we are supposed to be well on the road to economic recovery. We must remember that the stock markets often act as a leading indicator to real-world indicators as such virus infections can get worse while stock markets make a recovery.

While things look right, it helps to keep in mind our worst-case scenario. If we examine the history of crashes, the most extended crash was the Asian Currency Crises in 1997, which lasted about 706 days. The worst dip of all time was in 2009 when the markets crashed 62%. So if we imagine a crash of 62% from the market peak of 3,407, the STI can dip to about 1,300.

So there is a strong case to be invested right now provided that you can withstand a drop to 1,300, which is a loss of about 50%. Leveraged investors can look forward to withstand a 53.33% drop if they choose an equity multiplier of x1.5. The rewards of taking on this risk are attractive: Investing in a portfolio that yields 8% under an equity multiplier of x1.5 will yield about 8% x 1.5 – 3.5% x 0.5 or 14.25%. 

Why I believe in the V-shaped recovery

I am betting on a V-shaped recovery even though it comes with no guarantee. Part of the reason is that I see the Chinese consumer being so deprived during their lockdowns; the big brand names are already benefitting from a spate of revenge buying in China – it was reported that a Hermès boutique store in Guangzhou raked in US$2.7m in one day. I believe the same pattern will engulf Europe and the US when their virus numbers come under control.

Another reason comes from the theory of efficient markets. For a market to become efficient where stocks attain their intrinsic value, information must first be processed by participants and incorporated into the actual stock markets.

Investors must act on their belief to make things happen in the markets.

From what I observe, the W-shaped theorists who believe in the double-dip are not incorporating their views into the stock markets. If their conviction is steadfast, they should be shorting the markets or selling their investments like the over-leveraged private banking clients in March 2020. Instead, they are holding onto their war chests and complaining about how fast markets have recovered. They might act if the markets lose another 10-15%, but right now, they are sitting on the sidelines.

As a believer in a V-shaped recovery, I am acting on my convictions, raising my leverage to about x1.5 and looking forward to my next milestone at x2. We’re actively buying at regular intervals.

So if I believe in a V-shaped recovery, what is my next step?

The next step is to join my free Webinar where I will conduct a 1-hour lecture to my existing students on Wednesday 22^nd May 2020 at 7.30pm. The theme is on how to invest during the market recovery from the COVID-19 crisis.

You can sign up here: https://drwealth.com/ermintro/

I will cover two topics :

• How will a market bottom look like?
• How to develop an investment strategy for the post-COVID-19 era.

We will illustrate how a future strategy should look like with the REITs asset class.