Stocktake: Reinvesting when terrified
Buying into a collapsing market is tricky. How should investors respond?
A pedestrian walks past quotation boards displaying a share price from the Tokyo Stock Exchange. Photograph: Kazuhiro Nogi/AFP
The global coronavirus outbreak could be over by June if countries mobilise appropriately, said Zhong Nanshan, the Chinese government’s senior medical adviser, last week. However, buying into a collapsing market is tricky; hence the old adage about not catching falling knives.
If you’re a long-term investor with cash, how should you respond? Nervous investors should read Reinvesting When Terrified, the famous letter penned by GMO founder Jeremy Grantham near March 2009’s major market bottom. Every decline will enhance the “beauty of cash” until “‘terminal paralysis” sets in, wrote Grantham.
“Those who were over-invested will be catatonic and just sit and pray. Those few who look brilliant, oozing cash, will not want to easily give up their brilliance.” However, paralysis results in missed opportunities. The S&P 500 more than doubled in mid-1933; UK stocks rallied 148 per cent in five months in 1974; global stocks never looked back after bottoming in 2009. To cure terminal paralysis, you must have a battle plan for reinvestment and stick to it, said Grantham, who recommended “a few large steps, not many small ones”.
Life is simple, he wrote. If you invest too much too soon, you’ll regret it; if you invest too little after talking about big potential returns, then “you deserve to be shot”.