Investing Lessons from 2020

By Amit Rupani, CFA

In March of this year, S&P500 lost nearly 34 percent in about four weeks from all-time highs that it reached in February. It was the fastest 30 percent sell-off ever, exceeding the pace of declines during the Great Depression. As the saying goes, that the air goes out of the balloon much faster than it went in. That is always the case with stock markets. It takes stairs on the way up but elevator on the way down.

As of the writing of this article, S&P500 is now up about 62 percent from the March bottom and up 12 percent for the year 2020. I will not be surprised that we end this year with positive returns. During peak crisis in March when almost the entire northern hemisphere was locked inside their homes with no trade and commerce, I never imagined in my wildest of dreams that we would end the year with a positive return. We were in completely uncharted territory that the world had not seen in probably more than a century. While I had no doubt back then that stock market in general was available at very attractive valuation and that it would recover all the losses, the main question that I had was how much time it would take for stock markets to get back to February 2020 levels.

Everyone knew that we were going to enter into a recession, but the main question I had was – are we going to have a Great Depression like the 1930s? It took about 20+ years for stock market to recover all losses from 1930 peak. Even for someone who had entered in at the peak of 2000 dotcom bubble had to wait for 12+ years to make any money. Market highs of 2000 dotcom peak were surpassed only by early 2013 after seeing many painful declines in between. Going through a prolonged bear market for a very long period of time in the stock market was my biggest fear.

Below are some of my biggest learnings from 2020 from an investing standpoint:

Doing Nothing: As my column name at Saathee magazine, Buy Right Sit Tight, doing nothing and not panicking even when your stock market investments have fallen heavily, remains one of the best investment strategies of all time. It is easy but difficult to follow. It should be applied only after two pre-requisites are met. First and foremost is that one has bought a “right" business. And secondly one has long investment time horizon ahead of them. As one gets closer to retirement stage, “right asset allocation" (mix between equities, bonds, and other asset classes) can be very helpful to do nothing and get through tough market times. 2020 has been a classic example of best year to have applied to do nothing. Even if one had not built up courage to add more stocks due to uncertainties when they were down, at least not selling in panic and holding to your “right" businesses would have made you money.

Terminal Value Impact: Value of any financial security is nothing but the sum of present value of its future cash flows. And future cash flows are built-up of two components; intermediate cash flows and terminal cash flow. Intermediate cash flows are immediate cash flows that we can predict with reasonable confidence level. It can be as short as two years or eight years depending on the nature of the business. Since all public listed businesses are treated as going-concerns we have to draw a line somewhere until we can forecast its intermediate cash flows. And then at that point we assume that the business will continue to grow at an inflation rate or normal nominal GDP growth rate.

Let me share an example with some numbers to make sense of above lines. Let's assume that we have a business where we can forecast their earnings only for next five years starting 2019 till 2024. It earned $100 in 2019 (which was known by February 2020) and our forecast is that it will grow its earnings at 10 percent every year until 2024 and at 5 percent after terminal period. If we assume 20 times earnings multiple for 2024 and discount at 10 percent rate, its present value would be around $2500. Below is the table explaining calculation of the numbers.

Now back in February/March we had no clue when the pandemic would end and when would we come back to normal. But it was safe to assume that humanity would beat COVID-19 at some point of time in the future. Now using the benefit of hindsight, we know that with vaccine announcements things should come back to normal and let's assume that we go back to normal starting 2021. But let's also assume that 2020 was a wash-out year and our business didn't earn $110 that we had forecasted at end of 2019. The 10 percent growth trajectory shall resume from 2021 as per our new projections. With this change below is what the valuation of the business would look like:

The value of our fictional business would have dropped by $400 to $2100 which is about 16 percent drop from $2500. Now if this business is available at $1250 during March panic, it would have been a bargain purchase. A business which is worth $2100 is available at $1250. Many such opportunities were available in the market in technology sector where actually there was no impact due to COVID-19 but in fact they were beneficiaries of the COVID-19 pandemic. One just had to use basic common sense and look at the sectors that were most impacted and least impacted and do above math.

If one notices, about 70 percent of the business value is in its terminal value. Market was rightly penalizing airlines, cruise lines, restaurants, and discretionary entertainment businesses since there was a big question mark on their existence during crisis and market was pricing in for them going out of business in most cases. If one was sure that a business's terminal value that they had in their portfolio was not at risk, there was absolutely no reason to panic. In fact, it was an opportunity to add more. Just the question was assessing the impact on their intermediate cash flows.

Howard Marks has beautifully shared in his book, The Most Important Thing that “the pendulum swing regarding attitudes towards risk is one of the most powerful of all. In fact, I've recently boiled down the main risks in investing to two: the risk of losing money and risk of missing opportunity. It's possible to largely eliminate either one, but not both. In an ideal world, investors would balance these two concerns. But from time to time, at the extremes of the pendulum's swing, one or the other predominates."

Happy Investing!


Amit Rupani, CFA is an Independent Investor, practices Value Investing principles, manages money for long-term wealth creation through Equities asset class. Email: