To most people, the US-China Trade War is a disaster. If you believe in the mainstream media, the trade war is a lose-lose situation. Stock market crashes, economic downturns and next financial crises are going to erode your wealth. But for a smart investor, it is a golden opportunity. Volatility shakes off weak hands and leaves money on the table for you to take.
I have written a few articles about how to invest during the US-China Trade War. You can check them out here. This is a big topic and it has more impact on us as an Asian investor compared to the Euro Debt Crisis from 2010 to 2013.
Believing the US and China trade war will end soon in an amicable manner is merely naive. I have highlighted during the so-called Trade War truce that it is not the end of the war, but a window for us to prepare for a more brutal battle.
To sail in this rough water, you need to keep these three principles in mind when you invest during this period of time.
- Focus on your financial goals, not the market
- Winning by not losing
- Beware of expectation mismatch
#1. Focus on your financial goals, not the market
Beating yourself up with the performance of the stock market can be a painful thing.
- When the market was down in December 2018, you may have thought, “Gosh, I’d better stop investing, the world is collapsing!”
- When the market had a 10% rally over the past few months, you may have thought, “Hmm, why didn’t my portfolio go up as quickly as the market?” or “If I had bought this and that stock, I could have made so much.”
- When Donald Trump snapped his finger last week with additional tariffs and the Huawei ban, the market declined rapidly. You may have cried, “Again? I thought it was over!”
The thing is that the roller coaster ride of the stock market had little to do with you. You are not an investment professional or someone who depends on trading to make a living. Let them figure about what to do next. You should just enjoy your life.
Look at the chart below. If Warren Buffett compared his stock holdings (represented by the share price of Berkshire Hathaway BRK/B in white) with the S&P 500 (in orange), he would have a heart attack.
Do you know Warren Buffett has underperformed the S&P 500 by 12% in the past 6 months?
At the same time. my GMC Growth Portfolio lost 0.3% and my GMC Income Portfolio made about 3.4%.
Does it mean I am now a better investor than Warren Buffett?
My point is, as I titled it in my previous investor’s updates, “investing is a marathon, not a sprint”. When you invest for a long-term financial goal, the biggest risk is not the volatility of stock markets, but your inability to stay invested and reach your financial goals.
In fact, most people understand this. But they confuse “investing for long-term” with “holding investments for long term”.
- When you invest for the long term, you take responsibility for your own investment decisions. Whether you are right or wrong, it is a learning process and your investment outcome will improve over the years.
- When you just hold investments without knowing why, you are relying on other people’s decisions. Whether you make money or lose money, it is due to luck and your result is temporary. There is no certainty that your investments can help you achieve your financial goals.
#2. Winning by not losing
In a period like now, you need to worry if you choose a buy-and-hold strategy. When you decide that you are going to sit there and let the market and time do the work, you need to be prepared for big losses over a very long period of time.
The trade war is not something new. The last “trade war” was between the G5 nations (US, UK, Germany, France and Japan) and ended with the Plaza Accord in 1985. Japan was the biggest loser and the stock market of this 2nd largest world economy (at that time) had a “lost decade”.
True, there is a high chance that the stock market will come back up, but most investors are not able to hold until that time. Here are the four stages of a typical “part-time” investor
- Buy on the first stock market crash (value buy!).
- Top up on the second crash (double down, the market always comes back).
- Hold for the third crash (run out of ammo).
- Sell all when the market is at the bottom (“this doesn’t work, I will try something else”).
To make money in the stock market, you need to do two things, buy and sell. Most people only focus on buy and never pay attention to sell.
Win small and lose big, that is why most people fail in investing.
The key to investing is not to be right all the time, but to lose less money when you are wrong. – Ivan Guan
#3. Beware of expectation mismatch
Most people think they make rational investment decisions, but in this article, I explained that the information you rely on is often biased. You may have an ideology of certain investment outcomes, but you seldom get what you wish for.
In Singapore, you read the Wall Street Journal and Bloomberg news and you quote investment research from the US based on US investors. That is fine for an academic purpose since the US has the most developed financial markets. But when someone told you that, based on some US research, nobody can beat the market and you can make 10% return by just doing passive investing through ETFs, you’ve got to dive in deeper.
It may be hard for you to understand, but the fundamental reason for the multi-decade bull run of the US stock market was due to the US deficit. Yes, the reason that they claimed to start the trade war.
It is too big a topic to explain in this article, but to put it in an overly simplified way, after the collapse of the Bretton Woods gold standard in the early 1970s, the United States struck a deal with Saudi Arabia to standardize oil prices in dollar terms. The petrodollar system elevated the US dollar to the world’s reserve currency. Through this status, the US enjoyed persistent trade deficits and became the global economic hegemony.
The Plaza Accord which I just mentioned earlier was enforcement for this status. The trade war is a partially a currency war.
In layman’s terms, a dominated position of the US dollar led to a strong stock market.
Does the Singapore dollar have the same status as the US dollar? Is a sluggish Singapore stock market over the past decade due to the individual companies or the macro environment? Is there any chance for the Straits Times Index to performance the same as the S&P 500 in the long run?
If you understand this, you can shift your focus to global asset allocation instead of stock picking. Invest globally and watch the money flow is the key for Asian investors.
Let me give you an example. One of the key indicators of money flow is currency. Since mid-November, I have repeatedly advised my clients to focus on China stock markets.
As you can see from the charts below, the Chinese renminbi was appreciating against the US dollar from Jan to mid-April. At the same time. The China stock market has outperformed US stock markets by nearly 20%.
The situation quickly turned since mid-April, with the US dollar rapidly strengthening against not only the Renminbi but to most currencies. As a result, the China stock market took a plunge and the money is flowing back to US stock markets.
Many people blamed the recent stock market crash on the US President Trump’s tweet that the US was slamming a 25% tariff to Chinese goods. But from the chart, you can tell that the market already moved before the tweet.
It is the company who determines the value of its stock, but it is the fund flow that determines the price of a stock. – Ivan Guan
Adopt a global momentum approach
The most successful investors know that you can never rely on one source of returns. That is why I am a firm believer in a Systematic Global Momentum approach.
First, you should always aim to achieve asymmetrical returns by identifying market trends. Secondly, you must have a rigorous system to manage your risk exposure if you are wrong.
Anyone can outperform or underperform the markets for a given period of time, but it is the investment strategies that will help you achieve your long-term financial goals that matter.
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