Nasdaq has plunged by nearly 25%. Is Now The Time To Buy or Sell? This is My Game Plan.

IMPORTANT: Please read the disclaimer before continuing.

Before I share my game plan with you, it is crucial for you as an investor to have an understanding of what happened globally in the last two years.

A few days ago, a friend sent me this image:

Investors have lost more money in this current decline as compared to any period in recent history. But this isn’t surprising, given that 80% of US dollars in existence were printed in the last 22 months. 

According to techstartups.com, “to understand the magnitude of the Fed’s money printing, we need to go back 22 months ago. At the start of 2020, there was $4.0192 trillion in circulation. On January 4, 2021, the number increased to $6.7 trillion dollars. Then the Fed went into overdrive. By October 2021, that number climbed to $20.0831 trillion dollars in circulation.”

How does this affect the prices of everything? 

The number of cars, houses, farms, factories, logistics, and ships did not multiply significantly during the period between 2020 to 2021. But the amount of money did. This means that we have more money chasing the same amount of products in the world. 

The prices of everything have to go up, and they did. This included stock prices too. 

Jerome Powell, the chairman of the Federal Reserve, had no choice but to go on a money printing spree to save the economy from a recession. But they overdid it. As a result, we see inflation happening all around the world. 

Persistent inflation is detrimental to the economy because it weakens consumer confidence and slows down the economy. To reverse this issue, the Federal Reserve needs to perform an operation called monetary tightening. It’s done by raising interest rates. 

How does this affect investors?

Higher interest rates are detrimental to the valuation of companies. 

In Buffett’s words, “The value of every business, the value of a farm, the value of an apartment, the value of any economic asset is 100% sensitive to interest rates. The higher interest rates are, the less that present value is going to be. Every business, whether it’s Coca-Cola or Gillette or Wells Fargo — its intrinsic valuation is 100% sensitive to interest rates. Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe.” 

This is why we see share prices of Sea, Snowflake, Crowdstrike, Tesla, Netflix, and Meta coming down. 

On 4 May 2022, the Federal Reserve raised the benchmark interest rate by 0.5%, so it’s somewhere between 0.75 to 1%. Is that enough to tame the inflation rate of 8%?

Many investors, like Thomas Peterffy, expressed a view that interest rates need to be raised higher to more than 4%. 

This means that we are still in the early stages of a monetary tightening cycle. Many members of the Federal Reserve mentioned they would follow through on its intentions to raise interest rates until inflation comes down to the Fed’s target level. 

What happens if interest rates are raised further? The valuations of companies will be compressed further. 

Knowing this, should we wait for further interest rate hikes before buying more stocks? You could deploy such a strategy. In my view, the markets are forward-looking and the current stock prices might be pricing in an environment with higher interest rates already.

I also don’t believe in timing the market. Instead, I’ll be focusing on aspects of investing that I can control. 

Here’s my game plan

1. Choose good companies that can weather a possible recession, can raise prices during times of inflation, and have strong balance sheets. 
2. Demand a higher margin of safety (at least 20%) for stocks that I want to buy. For example, based on my valuation methods, if a company is worth $30, I won’t buy it at $30 or $28. I might buy it for $24 instead. Take $30 multiplied by 80%, you will get $24.
3. Spread out my dollar-cost averaging activities. Instead of buying stocks monthly, I will wait for the quarterly results of companies and re-assess them before buying. I’m doing this because this challenging macro-economic environment will change how some companies operate. I need both good prices and certainty in companies in my portfolio.
4. Keep my body healthy, exercise more, and spend more time with loved ones. Why? Going through a tough period in the stock market is mentally challenging. I want to keep my mind sharp to take advantage of current opportunities.
5. Tune out the news because it often spreads fear. 
6. Work harder and earn more money so I can deploy this capital in the stock market.

While it’s tempting for any investment experts to make a bold claim about where the stock market is heading in the next few months, I will steer away from making such comments. Such experts may sound very smart. In reality, nobody knows.

Many new opportunities will appear soon. We need to take advantage of them to build generational wealth. This is especially true for new investors who haven’t deployed their money. It’s time to equip yourself with the relevant investing knowledge so that you can make the right decisions in the stock market. 

Look at the price performance of these companies with growing revenues – you can see that they are facing a steep correction:

Some investors might feel fear after seeing these huge declines. Another group of investors might take advantage of it. These discounts are rare – it’s the first time we are seeing this in almost 13 years of bull run. Always remember to do your valuations!

Finally, as a piece of comforting news, we spend more time in bull markets than in bear markets. 

This too shall pass.

Stay safe and happy investing. 

PS: When the price of a stock falls, most investors would buy it, thinking that if it returns back to its original price or all-time high, a profit could be made. However, this is a common mistake! If you are holding on to a dying company, chances are it might never fully recover from a market crash.