Seven steps to invest more safely amid tariff turmoil

BY NOW, you would have heard about the Trump administration’s tariffs. I will spare you the details, but one thing has become certain: The business environment has become uncertain.

The stock market has spoken. As at Apr 12, the Nasdaq Composite Index is down by more than 17 per cent from its peak. A single question dominates the conversation: Is this a buying opportunity for investors? There is no simple answer, unfortunately. But there may be steps you can take if you decide to proceed and invest.

Step 1: Start with a great business

Behind every stock is a business. In my mind, the choice of business is the single most crucial factor in investing. A great business can grow its revenue, protect its profits, and generate increasing amounts of free cash flow (FCF). Choosing a great business provides your first layer of protection.

Bear in mind, if tariffs impact an entire industry, then you want to have the industry leaders on your side. Consider this analogy: if you tie a weight on every Olympic swimmer before a competition, who do you think will win? The strongest swimmer still comes out ahead.

Step 2: Seek financial strength

Great businesses usually come with an important perk: financial strength. In times of uncertainty, having cash on hand provides the flexibility for the company to weather any unpleasant surprise, be it loss of revenue or profit. Cash also affords the business the chance to invest when others cannot. This factor is the second protective layer.

Take Meta Platforms, the owner of Facebook, WhatsApp, and Instagram. The social network operator has nearly 3.4 billion daily visitors to its sites, which underpins its thriving advertising business. It is a reach that competitors will find hard to match.

In addition, Meta also boasts a net cash position of almost US$50 billion on its balance sheet, giving it the financial firepower to invest in growth initiatives, our next topic.

Step 3: A growth catalyst sweetens the deal

How do you separate a great stock idea from a good one? Try looking for a growth catalyst, an under-rated factor in the investor’s toolkit. Going back to Meta, the company recently revealed that its Advantage+ Shopping solution has surpassed US$20 billion in annual revenue, doubling in just five quarters. That is not all.

Before that, Meta said that its Click-to-Message solution, featuring WhatsApp and Reels advertising revenue (think TikTok) had exceeded US$10 billion in annual revenue run rate in 2022 and 2023, respectively.

Why are growth catalysts important? A catalyst increases the visibility of a company’s future growth. If a business can grow amid uncertainty, it provides an additional layer of protection.

Step 4: Buying at a good value point

A great business also provides a strong foundation for the stock to be valued. In my eyes, a stock price consists of two key factors: the business, represented by its ability to generate FCF per share; and its associated multiple, the price-to-FCF ratio. The product of the two factors is the stock price.

Said another way, any share price movement is either due to its business or stock multiple. Currently, stock multiples are being compressed as investors fret over the tariff risk.

But over the long term, what you want is for the FCF per share to do the heavy lifting for the stock price. Meta’s FCF per share has increased by more than 150 per cent between 2020 and 2024. In other words, even if multiples were compressed, the main stock price driver would still be the FCF per share. For the record, Meta shares have nearly doubled since the end of 2020.

Of course, if you are able to pick up shares of a great business at a lower multiple, it will help to increase your returns in the future. In doing so, you add the fourth layer of protection in investing.

Step 5: When should you buy?

For the first four steps, the discussion is centred around the stock and its valuation. What is often neglected is when you should buy stocks.

As a first step, moderating your cash deployment is a valuable tool at your disposal, making up your fifth layer of protection. Always remember that you do not have to invest all your money at one go. Spreading out your buys is a better approach, in my view.

But how should you go about it? The accompanying graphic, shared last month, provides a blueprint for how you can stagger your investments based on the decline from the market’s peak.

This blueprint represents a yardstick to keep your cash deployment in check. It is not meant to be the driver for how fast you should invest. The key determinant is still the business behind the stock.

If there are plenty of buying opportunities at good value points, then the cash deployment range provides boundary lines for your investment pace. But if there is not, then you should not be buying.

Step 6: Keep an eye on your stock allocation

Well-meaning investors can sometimes lose their bearings when stocks go on sale. If they are not careful, they could end up with stocks that they do not need, or worse, overcommit too much cash on a single position.

Falling stock prices are usually the culprit. Hence, always remember that you do not have to act in every single major decline in a stock.

You should buy stocks because you want to own more, and not because the stock price is falling. Keeping an eye on your stock allocation provides another layer of protection.

Step 7: Spacing out your buys based on risk

Here is another under-rated tool at the investor’s disposal: when to add to existing stock positions. Spreading out your buys leaves more room for the company to show what it can do, before you add to your position.

As a general rule, if the business is still unproven, then you should be more generous in spacing out your buys. Consider allowing a year or two to pass before you add to that position.

Here is a simple rule of thumb. If you have been following a new company for a year, invest no more than 1 per cent of your portfolio into the stock. If it has been five years, then increase it to 5 per cent. You can adjust this percentage to fit your risk appetite.

Get smart – the secret ingredient is you

There is an uncomfortable truth that every investor faces. You have to get comfortable with not knowing everything. If the market’s unruly behaviour last week is any indication, investors will have to contend with more policy shifts down the road. Their cascading effects create a business environment that’s anything but stable.

Similarly, businesses will have to wrestle with shifting political landscapes and unpredictable tariff changes. As an investor, keeping a level head is your best weapon.

So, be sure to do all that is necessary for you to remain rational amid this uncertain environment. That may be the best investment you can make.

The writer owns Meta shares. He is co-founder of The Smart Investor, a website that aims to help people invest smartly by providing investor education, stock commentary and market coverage.