Investing: The Time to Start is Upon Us

Ever wanted to try your hand on Wall Street or one of the world’s great trading floors? Jayden Soedirdja explains why now is the best time to start investing.

Before you read this article, I have one question.. 

Are you currently investing in the stock market?

If the answer is yes then congratulations! You are already ahead of 63% of the Australian population in securing the potential for your financial freedom and the chance to become wealthy. As Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” By being in the market at a young age, you are making the most out of the phenomenon that is compound interest. Not only that, but you are accruing experience and knowledge that you will use for the rest of your life.

If the answer to the above question is no, then that’s alright. I’m a bit sad but I have good news! 

The current global economic condition might provide you with the best investing opportunity in your lifetime. 

The most obvious question to ask is “Why?!” 

Why is it that current circumstances might provide the greatest investing opportunity of my life? Well… let me give you some context.

This chart reflects an index called the S&P 500. Basically, it takes the biggest 500 companies in America, compiles them into a single group and tracks whether their share price goes up or down. On a single day, if the majority of these 500 companies’ share prices go up, the S&P 500 will go up. It is a great index to get a general representation of how the overall market is performing. 

As seen in the chart, these 500 companies have been growing and growing; up 73% in the last 5 years. Favourable economic conditions, low interest rates and major growth in the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) have seen major growth in equity markets in recent times. In fact, it was because of this long and aggressive growth that got experts worried of a major stock market crash. The imminent threat of the ‘bubble bursting’ has been on experts’ horizons since late 2016/early 2017. 

After many years of constant stock market growth, something happened; an event that would grind world economies to a standstill as millions of jobs were lost as a result of a global shut down. COVID-19.

Now, in the time of COVID-19 where the world is basically in a standstill, you would expect the stock market to crash right? Well, it did. In March 2020, the stock market ‘crashed’, tumbling 32%. To give that a bit of context, the single month of March had erased over 3 years of growth in the stock market. And this was to be expected. Not only was the market already overpriced, but the economy had completely fizzled out. Unemployment in America hit 15%, a figure not achieved since the aftermath of the Great Depression. US GDP shrank by 9.5% between April and July, representing the largest quarterly drop on record whilst thousands of businesses had to close with the threat of never reopening again.

One thing you will get to know about the stock market is that it is run on two emotions: Fear and Greed.

In the month of March, peoples’ fears grew as they tried to limit losses by selling. Now on a supply/demand analysis, supply of shares vastly outweighed the demand of shares which caused the market to crash. However, moving back to present day (25th August 2020), the S&P 500 is now at an all-time high. Crazy, right?

How is it that in a global pandemic, a time of unprecedented volatility and struggle, the stock market is now at an all-time high?

Well, on the 23rd of March the US Federal Reserve stepped in to provide massive stimulus to help the economy. Now there is an old saying ‘Don’t fight the Fed’ meaning that stock market conditions will likely reflect the actions of the central bank, even in times of unfavourable economic conditions. Right now, is a perfect example. On this day, the stock market hit the bottom (as of yet…. Which I will explain later). The S&P 500 rallied over 50% to current day. To put that into perspective again, the S&P 500 grew by 73% in 5 years from 2015-2020. In the space of 5 months (April-August), the S&P 500 grew by over 50%. Absolutely ridiculous!

Central banks around the world have injected money into their respective economies in a bid to soften the impacts of COVID-19. Initiatives like JobKeeper and JobSeeker were released whilst central banks cut interest rates in an effort to encourage people to keep spending. But shops were closed due to the pandemic so where did people spend their money……well…. The stock market!

Now coming back to the question that if you are still reading you are probably interested in. Why is it that current circumstances might provide the greatest investing opportunity of my life? If the stock market is so high then isn’t this not a good opportunity? Well, not necessarily. 

At the end of the day, governments around the world do not have unlimited money. Eventually government initiatives like JobKeeper and JobSeeker will cease. Unemployment around the world still remains higher than in the Global Financial Crisis and companies around the world are reporting substantive losses. In my opinion, and this is only my opinion; this false optimism that has been fabricated by central banks and governments around the world will eventually stop as the impact of the worldwide shutdown fully confronts the naivety of modern society. The market is already very overpriced with a P/E of 30, where the share price of companies greatly overestimates the value of the company. (If you don’t know what P/E is, don’t worry). The market will, by nature, re-adjust itself to where the value of the company is reflected in the price of its shares. 

When this happens , then this could be the greatest investing opportunity of your lifetime. Big names in the industry like Ray Dalio, owner of the biggest hedge fund in the world, predict the market to fall in excess of 40%.

So what is the take-home message from this article?

The market is currently at an all-time high when the world is experiencing the harshest economic period since the Great Depression. Eventually, the stock market will experience a reality check and track back to where the prices of shares reflect the value. When will this occur? Unfortunately, the answer to that question is well beyond my pay grade.

However, my advice is as follows: 

1. If you are already in the market, exercise caution.

2. If you are not invested in the stock market yet get into it.

3. The current global economic condition might provide you with the best investing opportunity in your lifetime. 

The rest is up to you.

Jayden recently won the inaugural CBA Global Markets Case Competition (held virtually this year). You can find out more about his achievement (with Stirling Hutchings) here.

Images: Pexels