About five weeks ago, the stock market (as measured by the S&P 500 Index) peaked on Feb 19th, sporting a 4.5% year to date gain. At the close today, the market’s year to date loss is 21.5%. While no one likes to see red figures, look on the bright side, the 21.5% is far better than the 31% year to date loss reflected on this past Monday. This short period is now the proud owner of some of the largest historical stock market moves… both up and down. Needless to say, volatility is in vogue!
In a market environment like this, the volatility is only exacerbated by irrational behavior. When the uncertainty becomes too much for many individual investors to handle, their actions will only drive the stock market further down to a point that stocks go on sale. While many institutional investors are required to manage their portfolio in a certain manner (triggering sales when not the best timing), individual investors typically are not and need to stay levelheaded.
Look no further then the tale of ZOOM Technologies (ZOOM) vs. Zoom Video Communications (ZM). One company is pretty much a defunct distributor of wireless communication products based in China and the other is the widely popular video sharing application that has by far, prospered the most during this crisis. Guess which stock price has increased the most over the past 5 weeks?
Well, ZM is up 44%, since Feb 19th. A nice tidy gain considering the stock market as a
whole being down nearly 25% during the same period. On the other hand, ZOOM had peaked on March 20th with a gain of nearly 600% since Feb 19th. It has now settled at a gain of 245%, before the SEC suspended trading today. So… either there is tremendous belief in an “out of business” Chinese corporation or a mistaken identity.
While this has nothing to do with selling stocks or “losing money,” it speaks to the irrational behavior of individual investors. Believe me, it’s not institutions buying ZOOM. Individuals are trying to get in on a winner and cash in on America’s new favorite company. And they are in such a hurry to do so, they don’t even take a few steps to ensure they are investing in the right company! You can’t make this stuff up!
In closing, we have seen bear markets before. And just like those, we will come out of this one. Uncertain times will bring about a volatile stock market, but there is no reason to exasperate it and turn it into a frenetic market. Stay calm and rational friends, focus on the long-term, and this too shall pass.