COVID-19 Investing … Dead Cats and Warren Buffet

You know, the last few months have been scary times for investors. Especially for individuals who are retired or are about to retire. What have I been doing? Staying calm and exercising my investing sense of humor. 

Let me share a few of my favourite investment terms or phrases. They tend to be irreverent and graphicly thought-provoking, and gosh darn it to heck, funny too! In no particular order, they are “dead cat bounce”, “catch a falling knife”, “keeping the powder dry”, and “how the rich get richer”.

Humorous yes, but what do all these descriptive phrases that are in widespread use actually mean? I find that the definitions available at the Investopedia.com website are an excellent resource when the need to understand a particular investing phrase arises.

Yes, There Are Actual Definitions for These Terms

All definitions are from the Investopedia.com website –

Dead Cat Bounce – “A dead cat bounce is a temporary recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. A dead cat bounce is a small, short-lived recovery in the price of a declining security, such as a stock. Frequently, downtrends are interrupted by brief periods of recovery—or small rallies—where prices temporarily rise. The name “dead cat bounce” is based on the notion that even a dead cat will bounce if it falls far enough and fast enough.”

Catch a Falling Knife – “The term falling knife suggests that buying into a market with a lot of downward momentum can be extremely dangerous—just like trying to catch an actual falling knife. In practice, however, there are many different profit points with a falling knife. If timed perfectly, a trader that buys at the bottom of a downtrend can realize a significant profit as the price recovers. Likewise, piling into a short position as the price falls and getting out before a rebound can be profitable. Moreover, even buy and hold investors can use a falling knife as a buy opportunity provided they have a fundamental case for owning the stock.”

Keeping the Powder Dry – “Dry powder is a slang term referring to marketable securities that are highly liquid and considered cash-like. Dry powder can also refer to cash reserves kept on hand by a company, venture capital firm or individual to cover future obligations, purchase assets or make acquisitions. Securities considered to be dry powder could be Treasuries or other short-term fixed income investment that can be liquidated on short notice in order to provide emergency funding or allow an investor to purchase assets.”

The Rich Get Richer – Investopedia.com doesn’t provide a specific definition for “the rich get richer”. What the statement implies is, that in opportunistic times that are ideal for making lots of money quickly, the rich are often the individuals in the best financial position to seize that opportunity.

Speaking of the Rich

Whenever I think about the rich getting richer I think of Warren Buffett. This led me to wonder, “how much cash is Warren Buffett sitting on right now?” So off I went to Ye Olde Inter-web in search of that information. I was expecting to find that he was sitting on between $20 and $30 billion… which is an absolutely enormous amount of money. And, I’m not even sure why I picked this particular amount. 🙂

According to a barrons.com article that was published on March 16 he was sitting on $125 billion in short term bonds at the end of 2019 … just before the “fit hit the shan”!! This represented about “cash and equivalents account for about 25% of Berkshire’s market value”. OMG!!!

Even by Warren’s standards this seems like a stupefying amount of money. I don’t know about you, but I am still working on my first billion. And by my calculations this should only take me a few more thousand years to accumulate. 🙂 The article went on to say “that holding T-Bills ensures that Berkshire will have cash available even in the most extreme circumstances to pay insurance claims, make investments, or meet other obligations.” The article reported that two other companies were sitting on mountains of cash as well –Apple and Alphabet (Google)… well run big companies like to be prepared for all eventualities apparently.

At the end of March 2020, the stock market plunged about 30-35%. This was a very serious, major contraction. An ideal situation for the “rich to get richer”. And so, they did. Many affluent investors who were sitting on cash started buying up equities at the deeply discounted value. As I write this on August 28, most stock markets around the world have bounced back close to their pre-crash levels. This means buyers have made upwards of 50% on their money in a very short period of time. “The rich got richer”.

And so did we… in a very small way. In March we had an extra $10,000 sitting around in our checking account. Like most people we know, we have simply not been spending any money in the first half of this year because of the pandemic. My immediate thought was that I should just tuck this away in the savings account with the other money I’ve not been spending and setting aside. But then I thought, “what would Warren Buffett do”? And my immediate thought was reach out and “catch that falling knife” and buy some of these deeply discounted equities. The net result was that on March 17 I bought 337 shares of Manulife @ $14.8495 and 113 shares of SunLife @ $43.638. As of August 28, the two purchases combined are up 31.19%.

That all sounds great doesn’t it. Until you realize we haven’t actually made that money yet because we haven’t sold the shares. This is strictly a “paper” gain. And because we are into “income investing” right now, we’re not likely going to sell them for quite some time. The other consideration when I bought was that the dividend yield for these two equities combined was approaching 7%.

So, What Did Warren Do?

So, what exactly did Warren Buffett do around this time? Did he pounce on this opportunity and use his mountain of cash to buy up a mountain of discounted shares or whole companies? No, according to an article on The Motley Fool website, “Buffett revealed that the cash he has on hand grew from US$137.2 billion at the end of March to a record-breaking US$146.6 billion as of June 30, 2020”. OMG and YIKES!!!!

The article went on to state –

“Despite the drastic decline in equities, the growing cash on hand suggests that Buffett is adamant that the current valuation is still not as attractive as it can be. Buffett is a firm believer in buying and holding assets for the long run. His refusal to go all-out with his cash hoard is a sign that there will be another market crash and that investors should begin preparing their portfolios.

Buffett has not outright stated that he believes another market crash is imminent. Buffett recently made acquisitions with an insignificant portion of his cash pile, but he’s saving the rest for when things become far worse.”

I guess the rich do get richer by buying into depressed markets, but perhaps the ultra-rich continue to grow their pile because they know exactly when it’s best to jump in and buy equities or large chunks of companies.

Warren is “keeping his powder dry” waiting for the right time to strike. Me too. 🙂

What About the Dead Cat Bounce?

I don’t actually have anything to say about the “dead cat bounce” other than I am definitely trying to avoid buying in one of these situations, and so should you. Think Nortel. But, I still love the phrase!

Thanks to the good folks at the Investopedia.com website for providing so many useful tools for investors to refer to. And, thanks for the use of you great dead cat graphic.

Happy investing.