"Watching all stocks reaching historical lows and portfolio decreasing 2-3% daily is a real scary experience. A general question, what is the probability of reasonable companies going bankrupt due to this unprecedented crash? "
@zaidi675 ,
What's happening now is without precedent, I sense, and it "feels" worse to me than the other major corrections I've experienced.
The Asian financial crisis in 1997/8 was confined mainly to what was then called the Asian "tiger" countries and the mining sector in Australia which had been benefiting from the demand for commodities leading up to the share contraction in the Asian tiger economies.
The bursting of the Dot Com bubble in 2000/01 was really a Silicon Valley collapse, and hardly felt at all in Australia, given Australia's lack of a technology sector at the time.
The synchronised global economic recession of 2003 played out over a period of around 12 months, so there was ample opportunity for contemplation and assessment of what was happening, and for portfolio adjustment.
The GFC was bad in terms of the extent of the fall in share prices, but those falls occurred in "slow motion", over a period in excess of 12 months.
Since the GFC we had the minor market corrections in the form of the Greek Debt crisis in 2012 and the Bond market jitters in 2018. But in each of those cases the fall in stock proces was quite limited, and took several months to occur.
This beast is on a different scale, in terms of the pace of the fall (measured, crudely, in terms of % fall per month):
View attachment 2064415
As you can see, this market crash has occurred very very fast.
Without precedent.
I think what the market is doing is anticipating some very severe pain in the real economy, and the longer the global economy is shut down, the greater that economic pain will be.
It is therefore almost guaranteed that business models that are weak, or companies that are not sufficiently solvent to be able to ride out the storm, will cease to exist.
And it is not inconceivable that even reasonable companies will go under, although companies that are at least reasonable should be able to secure the support of equity markets to recapitalise.
So that's the dire picture.
On the other hand, one must remember why one owns businesses: it is because - assuming they are the right quality businesses - they create wealth for their owners over time. Sure, along they way there are these sorts of unexpected traumatic events, but just like every economic crash that weeds out the weak companies, they are opportunities for strong businesses to become even stronger.
It's corporate Darwinism, if you like, whereby economic and equity market cycles result in efficient allocation of capital across the various sectors of the economy.
So while this is not fun to experience, it is one of umpteen painful "adjustments" that one should fully expect to encounter on a few occasions during one's investing career.
Make sure you don't own companies with elevated levels of borrowings at present.
(Actually, one should never own companies with elevated borrowings, but especially not now.)
Of course, you can be assured that there will be a swathe of people who become quite animated about these sorts of events, foretelling all manner of economic doom and calling the end of the financial world as we know it.
But changes in economic and financial systems are never instantaneous; they always take place over a extended period of time.
So while the newspaper headlines (and HotCopper forums!) will, over coming weeks/months, contain nothing other than horrible economic and financial news, the sky is not about to fall on our heads.
It will take time, but eventually things will slowly normalise and people will crawl out of their shells of anxiety and go about their business of working, playing, consuming, travelling, innovating, creating jobs, starting and growing businesses and, well, just doing what humans do.
I'm a great believer in human ingenuity to rise to challenges and to overcome problems.
We have been doing so for millennia.
This current challenge will also be overcome.
What I think one should derive from these sorts of severe economic dislocations are valuable lessons about:
1. which kind of companies go on to thrive and which kinds wither and die.
2. how the market responds to various developments (especially in terms of when it gets "bad news fatigue" i.e., it ceases to fall, despite the ongoing bad news and, importantly, when it starts to recover, often at the same time that the news seems to be at its most dire)
3. your own personal psychological responses to certain news/developments.
These lessons are important to equip you for you future investing journey.
"My limited understanding of the situation is if and when cases are on decline, the market will revive though not sure if it is too simplistic ignorance!"
Yes, you are correct, the market will recover long before the virus is completely under control.
There is much precedent to show that markets emerge from downturns not only when the "good news" is already evident, but when things are merely "less bad".
So things can still be be darn lousy but as long as they cease becoming even more lousy, markets can, and do, rebound
[*]. For example:
- In the 2003 global recession, the market started to rally almost to the day the first shots were fired in the US's invasion of Iraq.
- After the GFC the market bottomed literally at the same time that mortgage delinquencies in the US peaked.
- The market turned around almost the exact time that Greek bonds hit their maximum level of 35%
And I dare say that, given how far stock prices have fallen in such a short space of time, when the market does finally recover, its early stages will be quite dramatic (15% to 20% within a few days, is my instinct, and even if the rally isn't sustained, I expect there will be a number of isolated days of large gains.)
[*] Sometimes markets rally when things are still becoming even more lousy, but the
rate at which that increasing lousiness is slowing. (i.e., when the acceleration in "lousiness" slows).
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(20min delay)