5 Reasons Now is a Great Time to Buy Equities (and Venture Capital Funds)

As a follow-up to my earlier post about the dangers of the second-order effects of fear and panic in the face of global uncertainty, I wanted to further comment on why times like the present have historically been the moments not to follow the herd and sell everything, nor to take a “wait until everything is back to normal” approach, but to buck the trends, headlines and apocalyptic predictions, and buy while everything is on sale.

In the interest of full disclosure, I am technically talking my own book (as they say), as I’m currently running an early-stage venture fund that is still actively raising money, but I am, by nature, a staunch contrarian and firmly believe in everything I’m about to write.

Without further ado, here are 5 reasons why now is a great time to buy equities (and especially venture capital funds):

1. A Recession is Already Priced into the Market

The median and average declines in the S&P 500 during the 12 recessions since the Great Depression, from peak to trough are 24% and 32%, respectively. As of the close on 3/16 we were down 29.5% from the recent peak.

Of the twelve recessions since 1937, seven saw smaller selloffs than the current one, while four were materially larger, at around 50% (the other was reasonably close at 36%). Three of the four biggest drops were underpinned by major structural issues with the economy — sweeping regulatory changes following the Great Depression; the Middle East oil embargo and double-digit inflation; and the near-collapse of the global financial system. The fourth, a massive repricing of equities following the dot-com bubble, was less about the economy than it was about equity valuations.

Can the market go down further from here? Of course, but historically speaking, any looming recession seems to already be mostly (if not fully) priced into this market, and unless we start to see significantly higher death rates among those in the global workforce, it does not appear that there will be lasting structural damage from COVID-19.

2. The Stock Market Isn’t Actually That Great of an Economic Forecaster

“The stock market has predicted nine of the past five recessions.”

One of my favorite Wall Street quotes (from economist Paul Samuelson) which we generally see in the financial press whenever market declines get into double-digit percentages, and for good reason. While the stock market is considered by most economists to be a leading economic indicator, it’s also wrong about as often as it’s right when it comes to predicting recessions.

Since 1937 (per Yardeni Research), there have been thirty-eight selloffs of 10% or more that did not immediately precede recessions (vs. 12 total recessions) and 12 selloffs of 19% or more that did not precede recessions, including two in the current bull market, the last of which happened 15 months ago. In this most recent case, the market had fully regained its previous peak within two months (41 trading days), and two-thirds of that recovery was in the first 16 trading days following the low (one of the reasons financial advisors consistently tell clients to invest long-term and not try to time the market).

3. It’s Always Darkest Before the Dawn

As one might expect, public equities generally have their best returns in the years following these major market selloffs, especially the immediately following years — even at times when the economy is still in recession — and the deepest selloffs are generally followed by the largest gains. This phenomenon is even more pronounced in the private markets. Not only do PE and VC funds launched after huge market selloffs tend to be the best performing vintages, they also tend to be the biggest outperformers relative to public markets, often by many magnitudes.

For example, (per Cambridge Associates’ private equity and venture capital indices), venture funds launched in 2007, in the teeth of the credit crisis, outperformed funds launched in the prior 10 years by an average of 9.3% per year. That’s the difference between turning a $100,000 investment into $186,000 versus turning it into $428,000. Furthermore, venture funds of this same vintage outperformed the S&P by 3.8% per year.

4. It’s What Warren Buffett Would Do (and Probably is Doing Right Now)

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

Probably Mr. Buffett’s most famous quote and a philosophy that has played maybe the biggest role in his long-term success.

As my venture partner will tell you, there are few things that rub me the wrong way quite like the, “Well if [insert successful investor] is buying this/passed on this, there must be something great about it/wrong with it,” line of reasoning. That said, there are very few people (frankly, probably none) who have as consistently trounced the indexes and outperformed everyone for anywhere near as long as the Oracle of Omaha. I’m also not suggesting you pile into Mr. Buffett’s specific investments, just adhere to his general philosophy (besides, as Buffettt himself would tell you, “Invest in what you know…and nothing more”).

While we’re here, a couple of additional Buffettisms relevant to the Corona Crash:

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”

“Don’t watch the market closely”

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”

(Incidentally, venture funds are generally 10-year vehicles — just saying).

5. Your Psyche (and Ego) Will Thank You

Psychologists tell us that we dislike losses more than we enjoy gains, which is one of the reasons that market selloffs tend to be so rapid, while stocks can grind higher for years before reaching tops. That said, getting a good deal also feels great (ever wonder why everything at Walmart is always selling at a “discount”?), and doing something constructive and proactive always feels better than sitting and fretting.

Now imagine yourself in 2028, hoisting a glass with your friends. One of them says, with palpable envy, “Boy, I wish I had put some of my cash into that venture fund when we all thought the Corona Virus was going to take over the world. How did you make yourself do it?”

You shrug and say, “Well it wasn’t easy, but there was one day at the height of the panic when I decided to block out the noise and consider the situation. That’s when it dawned on me that the world wasn’t ending and that I might not see an opportunity to buy-in at discounts like that for another decade.”