Benefiting from Those Stock Market Fears
|July 22, 2008||Posted by Roshawn Watson under Uncategorized||
By: Roshawn Watson
Back in October 2002, several people got out of the market after a substantial drop following the tech bubble bursting. Consequently, many missed the average 12.8% return between 2003 through 2007.
Most investors fear losing money and will sell off even great stocks and solid index funds when the future looks difficult. You can make money by seeing unfounded fears for what they are and picking up investments at bargain-basement prices.
Warren Buffet offers the following advice to investors.
Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.
In other words, you have to find opportunities when there is a great deal of pessimism. Consider the decline in stock prices in 1974 after nearly two decades of stock price appreciation. Predictably, many people fled equities thereby missing some of the best deals. For example, Buffet began to purchase Washington Post (NYSE WPO) during this time and was not moved by its continued poor performance. Note that Washington Post has now appreciated 100 times since.
In short, overly emotional investors disregard market fundamentals, buying when they should be selling and vice versa. Emotions are malleable, but most just do not realize how much of their emotions they can control.
One of the first steps to control your market fears is to reassess the situation. For example, in 1987, an enormous appreciation in share prices between January and August preceded a crash in October. William Ruane and Richard Cuniff, chairman and president (respectively) of the hugely successful Sequoia Fund, remarked:
Disregarding for the moment whether the prevailing level of stock prices on January 1, 1987 was logical, we are certain that the value of American industry in the aggregate had not increased by 44% as of August 25. Similarly, it is highly unlikely that the value of American industry declined by 23% on a single day, October 19.
In other words, obtaining a more realistic and less emotional perspective (including a longer-term view) is critical for a proper assessment the situation. Let’s say you purchased a fund that is priced 20% cheaper than it was a year ago. If your pick is truly good, what makes more sense, scooping up more of it at the new discounted price or taking a 20% hit? A good way to answer this question is to forget about the fact that you purchased it for more and to consider whether at 20% off, the equity is on sale. After an prudent evaluation, if price is the only part of the investment that you no longer like, then perhaps you have the next Washington Post.
Additionally, wait on buying and selling decisions until you have thoroughly reassessed the situation. There are investors who repeatedly make fortunes off of others erratic buying and selling behavior. It is not easy because most people prefer to buy on the way up and sell on the way down. However, if you can learn to shop for equity bargains, just as if you were at the grocery store, you will quickly learn that one investor’s panic is another’s profit!
Although I do not endorse all of Kiyosaki’s teachings, he has a wonderful investment analogy in Rich Dad’s Guide to Investing. Investors would learn a lot from mimicking seasoned grocery shoppers. Savvy shoppers go to stores armed with years worth of price, brand, and quality information. They save money by (1) taking advantage of a store’s sales and (2) loading up on their favorite items in bulk at the sale price. Similarly, if you could scrutinize companies and funds and buy “sales” in bulk, you would be well ahead of the investing curve.
Gain control of those fears, for even in a bear market, there are tremendous deals to be found for those with a long-term horizon. Don’t let YOUR panic be someone else’s profit. Instead, harness your emotions and build wealth today.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.