It’s a dilemma. It’s one of the best times to invest, but also daunting.
Some wonderful companies are on sale on the stock market right now for less than they are really worth, and you can get a high return on your money if you invest it wisely.
However shops, restaurants, amusement parks, cinemas, malls and hotels are closed, and planes are stranded on the ground. We can expect companies to close down, even to go bankrupt. This means you could lose all your money.
You have to be careful. You cannot afford to invest in something that will disappear.
As the famous investor Warren Buffett said:
“There are two rules in investing. Rule no. 1: Never lose money. Rule no. 2: Never forget rule no. 1.”
But how do you do that?
Here are five steps to investing during a crisis.
1. Investigate: How affected are they really?
Is it a business that sells more or less during the crisis?
Have they closed the business down completely?
Or can they still sell some product or services online or by other methods?
Can the consumption of their service or product be postponed?
Can the product be held in stock, and can we expect a boom in sales later because people would just postpone buying and using or consuming it?
Is the product a perishable good and cannot, for that reason, be held in stock?
Some companies will experience a short term fall in the demand of their product, but because it’s something people or companies eventually need, we can expect the demand to rise again at a later stage. Many household necessities fall under this category.
Other companies cannot stock their product, because it’s linked to an experience or service in time. That’s the case for hotels, amusement parks, cinemas and many other types of companies in the entertainment and service industry.
2. Think long-term
Ask yourself: Will this company still sell their products in ten years?
Thinking long term can really help you when investing in an unusual situation like this.
There is no reason to believe that the corona virus means that people will stop drinking Coke, wearing sneakers or eating chocolate.
If you can answer yes to the question and feel confident that the company’s product will still be in the market in 10 years, you can relax a little.
3. Investigate how much debt they have
Companies with a lot of debt have the highest risk of going bankrupt.
You can compare it with individuals:
Let’s say you have two people who are very alike: same income, same type of house, same kind of car.
The only difference is the amount of debt. One has no debt. The other has student debt, mortgage, car loan and even expensive credit car debt.
Both lose their job and their income. Both will be unemployed for a year.
Who do you think will be able to keep up with the mortgage payment?
It’s the same with companies. Companies with high levels of debt are most at risk in times of economic downturns.
As Warren Buffett says: “It is only when the tide goes out that you learn who has been swimming naked.”
4. Look at the numbers
There is no getting around it. You have to find that annual report and look under the hood of the company.
If you don’t, you have no business investing in individual companies. Stick to index investing.
Up until this point, has the revenue been growing, stagnating or declining?
Up until this point, have they made money? Has the company generated a profit? And was that profit growing, stagnating or declining?
You really do not want to invest in companies that are shrinking or who have a hole in the bucket.
Invest in companies with at lest 10 percent growth in both the top and bottom line (revenue and profit).
And yes, these numbers point to the past, and things are changing rapidly.
But if they couldn’t figure out how to grow sales and make money before the corona virus hit the economy, what are the chances that they will figure it out during or after the crisis?
5. Calculate the value
Not everything is cheap, just because the price fell.
Let’s say a banana sells for $10 on a local black market. Something happens and the price of a banana drops to $5.
That is indeed a 50 percent drop in the price. But is the banana really cheap? I mean, come on, it’s a banana.
A lot of private investors get caught up starring at stock prices, and they forget to relate the number to the company.
They might like the product, just like they like bananas.
But they don’t really take any time to figure out if they get a box of banana for $5, if it’s just a little bag or if it’s just one, single banana.
That’s what you need to do, figure out what the company is really worth and then divide that value by the number of shares outstanding.
It’s really important to learn how to calculate the fair value of a company before you invest in one.
Do you want to learn how to evaluate and calculate the value of a company? I teach you how to do that in my e-book Free Yourself. You can download it here.