The Bottom’s Up Guide To Investing For Covid-19
What do you get when valuations drop?
Add some ronies and volatility to the mix; you get uncertainty.
When starting out, it’s easy to get caught up making trades like a Wall Streeter. People are trading daily without paying attention to the yearly. The goal is to build wealth. You can’t do that when you sell whatever you bought this morning.
The current environment requires picking your investments from the bottom-up. Now is the time to be estimating a company’s future compared to its current valuation.
Build by positioning capital to profit from future developments.
Here’s the bottom’s up strategy for that:
Bottom’s up approach for a bottom period:
Invest when the share price trades much lower than a company’s value based on its cash flow.
Free cash flow is the clearest way to find flexible companies given the unstable economic conditions. Refer to quarterly reports to monitor any big adjustments in cash flow. Large increases in liquidity can also indicate rough times ahead.
Cash makes a stripper flexible
The bottom’s up method relies on cash flow. The more cash you give a stripper, the more she turns into Mrs. Incredible.
Same for a company.
A business searching to obtain capital during this cycle may be a sign of weakness. Pick companies with strong free-cash-flow through it’s internal and external operations.
Cash gives the business flexibility to adjust with the market.
Just like a stripper on a pole.
What you want is aggressive returns. Since a couple valuations are still underpriced, now’s the time search for prices that will correct and grow.
Searching For Long-Term Players
Bottom’s up approach requires long term holding positions because it may take time for the share price to correct itself. Volatile markets are often driven by fear and not the fundamentals. Patience is required for the fear to pass and price corrections to apply.
Pick long term players so that when the price does correct, the next cycle ensures future growth. Competent management and internal growth opportunities are good metrics to determine long-term players.
The Bottom Line for Bottom’s Up
- Getting the odds on your side is the most important thing aside from not losing money.
- Don’t always day trade. Have long-term holdings to position yourself for favourable odds.
- Cash can turn a stripper to Mr. Fantastic; similarly to a company’s flexibility with the market.
- Avoid mediocre investments in uncertain market conditions. Only place worthy bets.
To read more on the topic:
- Robin Williams and his take on liquidity during tough times
- My Main Man Tren defining the bottom’s up approach with a tweet
- 10 Rules of Thumb for a Volatile Market by Morgan Stanley
- An article to get the ball rolling for new investors
- A quote from Howard Marks and his most current stance on valuations:
“The outlook is not so bad, and asset prices are not so high, that one should be in cash or near-cash. The penalty in terms of likely opportunity cost is just too great to justify being out of the markets.”
I write better stuff here: (Click Subscribe To Hack The Mainframe)