Stock Market Frenzy: Explained
Eat.Pray.STOCKS
Editor’s Note: This material is for informational purposes only. Any information or viewpoints expressed should not be construed as an obligation to purchase any financial instruments or investments.
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Hello investors!
So much has happened in the world of investments in the last couple of weeks. If you have been following the stock market this month then you are well aware that many stocks have recently hit their 52-week high, all while there's been an increasingly alarming number of COVID-19 cases.
Amazon, Tesla, Microsoft, Nvidia, Netflix, Zoom, and DocuSign are just some of the many companies that have recently reached their 52-week high! That's literally astounding. You'll notice that almost all of the companies above have seen their business accelerate during Covid-19 and so investors are flocking to these "safe" companies. I'm constantly fascinated by the new highs of the market each day and I think it is important to be aware of why it's happening and how to adjust our portfolios. This post will help give you a pulse of the current stock market frenzy, please enjoy.
1) This is when the greatest transfer of wealth happens:
Whenever recessions, pandemics, or prolonged volatility occurs, the rich get richer. During The Great Depression, companies with the strongest balance sheets (a lot of money, little to no debt) survived, while small businesses cratered. The same is true of many tech darlings in the COVID environment. As small bookstores, boutiques, and restaurants close down, people are forced to turn to larger conglomerates (Walmart, Amazon) for their everyday purchases. Savvy investors are buying Amazon in droves because they know it will outlast every small business, which is why Amazon went from $1,500 to $3,100 in a span of three months. "If you can't beat them, join them." 🤷🏾♂️
Advice: Flock to companies with strong balance sheets or that can raise money quickly and cheaply Amazon, Apple, Netflix, Facebook, and Cisco all come to mind.
2) Stick to COVID stocks:
There are several companies that are not only surviving COVID, but they are also excelling because of it. Before COVID, the acronym FAANG (Facebook, Apple, Amazon, Netflix, Google) was created to capture tech stocks that were poised to sustain explosive stock growth as they scale. In the COVID era, a new acronym has surfaced: DAWN (Domino's, Amazon, Walmart, Netflix). Notice anything? What happened to Google and Apple? Why are Amazon and Netflix the only companies in both acronyms? Domino's, how? Google and Apple are still fine companies, albeit they face uncertainties in their core business because of COVID. Netflix and Amazon appear twice because they remain resilient pre and during COVID. Domino's is a bit more interesting. Most restaurants are forced to pay delivery services to the likes of Uber Eats, DoorDash, and Grubhub—a big percentage of already shrinking profits. However, Domino's owns its delivery structure and as a result, were able to actually ramp up their number of deliveries. Domino's a bona fide COVID stock because they hired their own drivers. Can you think of any other companies who saw sales increase due to COVID?
Advice: Flock to companies that have become more resilient because of COVID. DocuSign, CrowdStrike, Telsa, Amazon, Costco, BJ's, Zoom, Chewy, Clorox, and Pepsi all come to mind.
image via unsplash.
3) Robinhood:
The proliferation of Robinhood has essentially made stock investing readily available to the public. The average investor on Robinhood is just 32 years old and has a good amount of disposable income. So what role does Robinhood play in this conversation? As stock markets declined, media outlets screamed that the time to invest is now! My mother even called me and asked if I could invest her money (if you know my mother then you know why this is so astonishing to me 😩). Due to the closures of businesses, stay-at-home orders, and cancellation of live sports, many millennials turned to stock investing to pass time. This "Robinhood frenzy" is the reason why companies reached astronomical valuations; many times when they were worthless (Hertz) or worth very little (HEXO). Whether this Robinhood effect was positive or negative is certainly up for debate, but the impact certainly isn't.
Advice: Stay away from popular Robinhood penny stocks (if it's under $5.00 I wouldn't buy it). Many traders have found that they can manipulate penny stocks into going up fooling novice Robinhood investors into purchasing the stock, just for the stock to go back down again. That $2.00 company that claims to be the next Netflix probably is not (I'm looking at you Genius Brands).
image via unsplash.
4) Do not chase:
Over the last few days, so many friends and family members have texted me about whether they should buy Tesla or Amazon or any other high priced stock. There is no straightforward answer, so I would say it depends. Purchasing any stock that is near its 52-week high is very risky because when stocks go down you will undoubtedly lose a lot of money (although some investors will recover, less capitalized investors likely will not). I think a better strategy—one I am currently employing—is to hold off on buying any stocks and waiting on a pullback to enter the market. If you are not already in Tesla or Netflix or Spotify (or any other expensive tech stock) I assure you there will be a better time to invest than now. Investing is a not a sprint its a marathon.
Advice: Most of your investment account should be in cash right now. Refrain from chasing expensive stocks and wait for a better time to buy back in.
image via unsplash.
5) Don't forget to take money off the table:
If you have been following this blog and purchasing some of my recommendations, then you are probably doing well! It is very important for you to sell stocks that have gone up in value to actually realize the gains. When I first started investing, I would continuously sell the companies that lost money and keep the companies that made money. After all, why sell companies that you were profitable in, right? However, the correct strategy would be to sell some of your profitable stocks and continue to let some of your unprofitable stocks play out because they can recover and make you more money! If only I'd known. If you were lucky enough to purchase, Tesla, Shopify, DocuSign, Peloton, or any other company that has outperformed the market, I would sell sell sell. Remember, you never really make money until you sell the stock.
Advice: I recently sold almost all my positions (except Netflix). I am waiting on a pullback before I get back in. You may lose out on short-term gains but if the markets turns bearish you'll only have your profits in stocks, not your principle.
As stocks continue to climb higher and higher you will undoubtedly be tempted to purchase stocks because of FOMO (fear of missing out). You have to refrain from doing so. We are in an environment where unemployment is at a record high and the stock market doesn't reflect that. We are currently in a economic bubble, investors that are aware of this will be the first to prosper.
*In terms of the $250 giveaway (check last week post) I will announce the winners in a separate email sometime in the next couple of days. Good luck!
Happy Friday. Happy Investing.
I read these every week. Joints are 🔥🔥!!! Keep them coming!