How taking advantage of emotions in the market can pay off
It is no secret vacations have been put on hold.
Airline and travel companies have been virtually at a standstill.
Those who have read my previous articles about passive investing know that I am all in support of investing for the long term.
I write about how you should be investing in an S & P 500 Index fund. I cite how since its inception, it has given investors a return of 10%. This is while being extremely diversified with 500 of the largest American companies.
Now I am going to do something odd and suggest individual stock trading and day trading.
Day trading is generally a bad idea.
The majority of studies conclude that most day traders lose money. One study, for example, cites studies of the tax returns of all 40 day-trading clients of one financial planner. They all lost money. Another study concluded that nine out of 10 day traders lose money (Chron).
If this is the case, then why am I telling you that it may be a good idea now?
People are emotional and short-sighted
It’s because as most times, the market is dictated by human emotion. Some people tend to believe that all technical and scientific information is included in the market.
They use convenient and matter-of-fact stories to explain things that happened in the past.
Look at the 2008 Recession for example — people were explaining it by saying it was a housing and credit bubble. They tend to have a ready-made general explanation. But at the time no one knew. If you somehow knew, I would question your sanity for not being super-rich right now.
In real life, people lose their cool and are reactive.
I monitor all my stocks from my TD-Ameritrade app, MSN Money News, and Yahoo Finance. Every time there is a dip in the market I see all the articles from sources like CNN, the Motley Fool, or MarketWatch suggesting we are entering a recession.
Oddly enough, the next few days see a gain and everything is back to normal. During the height of the pandemic, I wrote an article asking if we were approaching a recession as a rebuff to these other articles.
I wrote a few more articles telling people to trust in passive trading and not pull out of the market. I was met with a lot of negativity and backlash from people saying “see, you were wrong, the market will not always continue to rise and you made a mistake suggesting people invest in an index fund”.
On January 13th, 2020, the S & P 500 ETF I suggest, VOO, was at 302.06. On March 16th, it dropped to 209.65.
This is when people started criticizing me. People are too short-sighted and couldn’t realize this was a perfect buying opportunity. They thought this was the end and believed contrary to all reason that this would be the only time in history the markets would not recover.
On August 3rd, the market reached a new record and VOO was at 307.36.
Taking advantage of emotions in the market
Not only would I suggest getting a few index and sector (I prefer tech) ETFs — but I would also take advantage of individual stocks.
Coming from a person who is extremely averse to individual stocks, I am buying Boeing, most major airlines, and Carnival Cruise Lines.
All of these are well below their 52 week high and in my opinion, are very cheap.
Despite the delay in travel, most, if not all travel will return. I can see all these travel companies making a rebound. Even if they do not reach their previous highs, they will still make a lot of money.
Just as soon as January 17, 2020, Carnival Cruise Lines was trading at 51 dollars. Now it is at 15.19.
There is no doubt in my mind that it can still get lower.
investment banks Stifel Nicolaus and then J.P. Morgan warned that cruise lines’ return to operation may be more “gradual” than speedy this year (or next), and reduced their estimated value of Royal Caribbean stock accordingly (The Motley Fool).
As regulations keep pushing Carnival, Royal, and other cruise lines back, their stocks keep dropping. But the key is that their bounce back will be gradual.
If you are an investor set for the long term, an investment in these companies can pay off in the next year to two years.
This goes for all travel and airline companies — but it is magnified for cruise industries.
In my humble opinion, it is common sense that all these industries will come back. Even if they come back at half their highest values, there is a lot of money to make. This is one opportunity where I would invest in individual stocks.
Just be very careful and remember, I, like no one else can tell the future. I am not giving anyone advice and this is merely to be treated as speculation. Do your research before you decide anything.