Go on, admit it…at this very moment, you’re glancing at a business anchor who’s busy losing their mind on your telly. Yes, left, right & centre – lots of markets are correcting. Or should I say collapsing, tanking, plummeting, nose-diving, slumping, free-falling, or simply never ever recovering ever..! And if you can look past the hyperbole, some are unfortunately entering actual bear market territory. Kinda gets the blood pumping, eh? You really should switch off the TV, and just go meditate (or run a marathon) instead! It definitely could save you a few quid & a few stupid decisions. But we’re all too human – and now we’re addicted to this 24/7 diet of escalated corporate & market drama, so it’s become easier than ever for the media to stoke fear (and greed) in our hearts.
Traditionally, a 10% market reversal was defined as a correction, while a bear market was at least a 20% decline. But now the business media’s upped the ante, unilaterally adopting something like 3% & 10% as the new thresholds (respectively). [And I suspect politicians & central banks aren’t far behind]. Look at them now – glued to their desks, fuelled on Red Bull, and kitted out with adult diapers (think about it…live TV, energy drinks & too much excitement?!), they can barely contain their glee at this renewed market turmoil. Which is, of course, sheer madness…
But here we are, lapping it up – feeling so very serious about the market yet again. Because a reversal invariably hits us out of the blue, with the reasons why only trailing after, in its wake… [How many talking heads highlighted a global growth slow-down two months ago?! But now it’s the glib explanation you’re hearing on every business channel]. I mean, we began September with so much promise?! Personally (& somewhat counter-intuitively), I was fairly bullish myself – and I still think I read the charts correctly as being quite promising (though I definitely wasn’t keen on a 2,000+ S&P). Unfortunately, the price action & the charts never quite followed through, and now September & October are living up to their more usual grim reputation.
So, what am I going to tell you here..?
Well, it’s never that simple. I’ve no real desire to write one of those ‘Now is the time to buy…’ pieces – often, they’re just a different play on your emotions (inc. greed), and not much better really than those headlines screaming ‘Sell, Sell, Sell!!!!’. I’d prefer to be a little more dispassionate. So I should immediately admit: No, I don’t have some easy/reassuring fix to dispense here, in the face of a market correction. But we can consider some of the problems & anxieties we all face here as investors, the most immediate being the sudden realisation:
Jesus, I really don’t have a friggin’ clue what’s coming next..!?
Which is alarming on many levels, not least the fact this should have been obvious all along! Unfortunately, it usually isn’t – the gift of hindsight, plus rising markets, tends to breed over-confidence. Sure, we know our stocks, we know our market history, and we know if the market declines we’ll react in a totally rational fashion. We also know market corrections, and even bear markets, are scarcely more than blips on the long term chart. I mean, can you even find Black Monday on this chart?!
But the sheer panic & chaos investors experienced then, and the countless other market ups and downs over the years & decades, all tend to get air-brushed away by time. History’s the same: As students, textbooks present us with authoritative & linear narratives. Which is simply untrue… Go back & read the newspapers of the day, and rediscover history as it was really lived – it gets pretty bloody messy (just like life). It’s chock-full of detours, blind alleys, and wrong turns. The trivial gets exalted, while critical news & events are often marginalised at the time. And much of the time, as a society, we scarcely grasp what’s really happening…let alone where we’re going.
So basically, the ever-increasing daily cacophony of market noise you experience is simply another (specialised) example of the day-to-day noise of history. But that’s quickly forgotten when the market, and just about every stock you own, starts heading south. You hang tough at first…but then you hit some kind of inflection point. Where your confidence crumbles, and the cool calm logic you wielded flies out the window. That strange mixture of fear & greed all investors live with suddenly escalates & squirts a giant dose of adrenaline straight through your gut. And then the questions & the doubts arise:
Wow, look at those prices – shouldn’t I be buying?
But is this the bottom..?
And what about the financial crisis?
Could it really happen all over again..?!
I’ll never forgive myself if I don’t buy hand over fist.
But I’ll never forgive myself if I lose a fortune either…
But in all likelihood, the Financial Crisis was a once-in-a-lifetime event. And the most exceptional aspect of the crisis was the excessive & ridiculous leverage (and the related risk-taking) we saw preceding it, followed by the vertiginous market spiral which was horribly exacerbated by the overwhelming & inevitable forced de-leveraging. But I see nothing like that today. In fact, you have to return to Black Tuesday to find anything remotely similar. [Unfortunately, even if the recent financial crisis wasn’t seared into your psyche, your lizard brain would now be busy conjuring up just that kind of scenario anyway for your delectation…] So yes, we all know what logic & market history should dictate today:
Stay Invested/Get Invested!
After all, there’s no debating the fact equities provide the best long-term returns. And any fond notion you can nimbly dance your portfolio in & out of the markets is simply a pipe-dream. But regardless, when you (and the markets) become enslaved by fear & greed, you can’t help but agonise over what happens next. Except we’re inevitably besieged by noise, as I’ve highlighted, and in the end we just don’t know what’s coming next…frankly, the real challenge is to simply accept that fact. Why worry about what you can’t change or control? Yeah, sounds a little new-age – but can you really think of a more effective alternative?
But there’s still a surfeit of fear & greed to deal with… And it feels like the only way to relieve the stress is to actually do something – whether that’s buying, selling, or just plain old panicking! Instead, I’d suggest you have a butcher’s at Fear & Greed (I) & (II), which list a dozen different tips & tricks for dealing with these emotions. As with an investment checklist, these might usefully be adapted to better suit your own strengths & weaknesses – but I’ve found each valuable in its own right, so I definitely recommend you give ’em all a fair crack of the whip. Unfortunately, the best time to implement & utilise many of these tricks is when everything’s smooth sailing – well ahead of any market wobbles. But I would single out three of them as critical to the current situation…
Worship The Spreadsheet: Any good trader uses this trick – he purely views his P&L as a performance tool, it has absolutely nothing to do with (real) money. [Well, except perhaps for the last day of the year!] It’s a relentless feedback mechanism which evaluates & confirms the success or failure of everything he does (or doesn’t do)… Which is how good traders become great traders, by training (or ‘fooling’) themselves to become utterly dispassionate about making or losing money. As an investor, your P&L equivalent is (presumably) a portfolio spreadsheet. Right now, I implore you, look at your spreadsheet with fresh eyes:
‘I want you to create a friggin’ majestic portfolio report that’s so complex & removed from reality, it will hypnotise you into believing it’s purely an interesting academic exercise. It’s Monopoly money, at best…’
Any day (month/year) you look at your spreadsheet, and see your stocks & overall portfolio declining, just remember it’s simply a feedback mechanism – it’s perfectly acceptable to ask: ‘Am I doing something wrong? What could I could be doing better?’. But you also want to convince yourself it’s never about money, or your actual personal wealth. I’ve long persuaded myself I’m just looking at a spreadsheet & numbers each day that simply documents the ongoing results of an interesting intellectual exercise – i.e. stock-picking. [And at this point, I’m suitably immunised – seeing twenty grand wiped off my portfolio genuinely means less to me now than losing a bloody twenty in the street!] This all helps to minimise the pernicious impact of fear & greed in my day-to-day investing…and accordingly, I analyse & execute my investment decisions with far greater logic & clarity.
Forget Your Purchase Price: This deserves to be a separate trick… Because there’s nothing worse than obsessing over the purchase price of a stock. It’s a perfect opening for fear & greed to persuade you to cut your profits & run your losses – the predictable & debilitating strategy of every bad trader & investor. Go on, delete any kind of purchase price/cost base from your portfolio spreadsheet. And excise them from your memory also…
Now you’ll be forced to evaluate each stock purely on its merits, as of today – what’s the current share price, what kind of risk(s) does the stock now present, and what’s your fair value estimate and/or price target? Gains/losses to date are no longer part of the equation – they’re essentially sunk costs – which leaves fear & greed far less ammunition to play around with now. Again, this means you’re going to be far more logical when it comes to determining if a stock is now a buy, sell, or hold.
Sell One, Buy Another: For many investors, this may be the best trick in the book for conquering fear & greed. Fortunately, it also addresses the dilemma I highlighted earlier – what on earth can you do to relieve the stress of a market meltdown? The answer is to take advantage of a crisis…by turning it into an opportunity!
If the market was down 20%, for example, many of the stocks in your portfolio are really getting whacked. Maybe they’re junk, maybe they’re not – but with big losses piling up, they’re turning into a real challenge for you to evaluate, let alone to sell… [Like I said, ignoring your purchase price really helps here]. But consider the bigger picture: You now have a bunch of superior stocks on offer in the market – some of which have probably gotten beaten up just as much, in terms of price. I can obviously talk about intellectual property, competitive advantage, brands, moats, management, etc. – but frankly, it’s pretty easy to recognise these stocks. They invariably belong to (large-cap) companies who can boast of higher & more reliable long-term earnings growth (or return on equity) – i.e. that rare breed of long-term compounders.
Which is exactly the type of share that’s normally priced way out of your reach. Though ideally it’s a stock you’ve previously tagged as interesting – only now it’s finally cheap enough to actually consider buying! [See here: Cheap & Interesting!] Otherwise, now might be a very good time to scramble, lock yourself in a room, and only surface when you’ve identified & analysed a list of potential high-quality bargains lurking in this market. [This applies just as much for growth investors, as it does for value investors – we’re all guilty at times of accumulating small-cap junk, for example, in our portfolios].
Think about it – who cares if you’re stuck with/have to sell stocks at a loss, if this also means you’re now in a position to buy into far superior stocks? Stocks you may never have had a chance to buy otherwise… That’s a trade I’m happy to consider each & every day. Frankly, I’ve never spared a second thought for losing stocks I’ve sold in this kind of scenario. Dare I say it, a real market downturn (as we’re seeing now?) may offer one of the best long-term investment opportunities available – a chance to seriously upgrade the quality of your portfolio.
So why not embrace it..?