Regarding market crashes, investment guru Peter Lynch mentioned in his book 'One Up on Wall Street' long ago. In his view, a stock market decline is nothing surprising, just like winter coming again and again, which is quite ordinary. Investors only need to prepare their coats in advance.
During the 13 years when this investment guru managed the Magellan Fund, its assets increased 27-fold, creating a legendary wealth story in the history of mutual funds.
Whenever the stock market crashes and I feel anxious about the future, I remind myself of the fact that there have been 40 stock market crashes throughout history to calm my somewhat fearful heart. I tell myself that a stock market crash is actually a good thing because it gives us another great opportunity to buy stocks of excellent companies at very low prices.
01 Stock Market Crashes Are Normal Events
Perhaps there will be even bigger stock market crashes in the future, but since I cannot predict when they will occur, and to my knowledge, none of the other investment experts participating in the Barron's Roundtable can either.
Then how can we fantasize that each of us can prepare in advance to avoid the disaster of a crash? Even if I had predicted 39 out of the 40 stock market crashes that occurred over the past 70-plus years and sold all my stocks before the crashes, I would still deeply regret it.
Because even after the biggest stock market crash, stock prices eventually rebounded and rose even higher.
A decline in the stock market is nothing surprising; such events happen again and again, just like the repeated arrival of harsh winters in Minnesota—it’s simply a common occurrence.
If you live in an area with a cold climate, you are already accustomed to it and expect temperatures to drop to freezing levels. Therefore, when outdoor temperatures fall below zero, you certainly wouldn’t panic and think that another ice age is coming.
Instead, you would put on your fur coat and sprinkle some salt on the sidewalks to prevent icing, and that would take care of everything. You would comfort yourself by saying—winter has come, can spring be far behind? The weather will warm up again by then!
The relationship between successful stock pickers and stock market declines is akin to that between residents of Minnesota and cold weather. You know that stock market crashes will always happen, and you prepare in advance to weather them safely. If the stocks you favor fall along with others, you will quickly seize the opportunity to buy more at lower prices.
Following the stock market crash of 1987, when the Dow Jones Industrial Average plummeted by 508 points in a single day, investment experts unanimously predicted an impending market collapse.
However, it later turned out that, despite the Dow Jones falling by as much as 1,000 points (a decline of up to 33% from its peak in August), the anticipated doomsday scenario for the stock market did not materialize.
This was merely a normal market correction, albeit one with an exceptionally large adjustment. It was simply the most recent instance among the 13 corrections exceeding a 33% drop in the stock market during the 20th century.
Since then, even though there has been another market downturn with a fall exceeding 10%, this is only the 41st such occurrence in history. Or to put it differently, even if this were a market plunge with a decline exceeding 33%, it would still be only the 14th time in history—nothing extraordinary.
In the annual reports of the Magellan Fund, I have frequently reminded investors that such market pullbacks are inevitable and bound to occur; under no circumstances should panic ensue.
02 Focus on the 'Bigger Picture' When Investing in Stocks
Whenever I feel anxious or disheartened about the current state of affairs, I make an effort to shift my focus to the 'bigger picture.' If you wish to maintain confidence in the stock market, it is essential to understand the concept of the 'bigger picture.'
It sounds simple: 'Well, the next time the stock market falls, I will ignore any pessimistic news and take the opportunity to buy some oversold stocks at a discount.' However, putting this into practice is far from easy. Every crisis seems more severe than the last, making it increasingly difficult to disregard negative news.
The best way to avoid being frightened into selling stocks due to pessimistic news is to invest a fixed amount of money into stocks on a regular monthly basis.
The biggest flaw of selecting stocks based on gut feelings is that after the stock market has surged by 600 points, stocks are often overvalued. Yet people tend to believe the market will continue rising and end up buying at high prices, only to suffer significant losses when the market adjusts.
After the stock market plunged by 600 points, stocks were generally undervalued. People, however, felt that the market would fall even lower, and as a result, they missed the opportunity to buy at low prices when the market rebounded later.
If you are not strictly following a monthly fixed-amount investment plan for purchasing stocks, then you need to find a way to maintain unwavering confidence in the stock market.
Confidence and stock selection are rarely discussed together, yet successful stock selection relies heavily on maintaining strong confidence.
You might be the world's best financial analyst or stock valuation expert, but without confidence, you will easily believe the pessimistic forecasts reported in the news and panic-sell during market turmoil.
Even if you invest your funds into a fairly good investment fund, without confidence, you may sell out of fear during times of panic, undoubtedly often at the lowest and most unfavorable price.
What kind of confidence am I referring to? It is the consistent belief that the United States will continue to grow and develop; that people will continue living normally, putting on pants one leg at a time as they always have in the morning.
Companies producing pants will continue generating profits for shareholders; believing that old enterprises will eventually lose vitality and be replaced by dynamic companies like Walmart, FedEx, and Apple; and trusting that the American people are a hardworking and creative nation.
It even extends to believing that even for yuppies, despite having lucrative professional jobs and affluent material lifestyles, laziness and lack of effort will still draw harsh criticism from others.
The 'bigger picture' refers to viewing the stock market with a longer-term perspective. Historical long-term statistics show us that over the past 70 years, stocks have delivered an average annual return of 11%, more than double that of treasury bills, bonds, or certificates of deposit.
Despite numerous large and small disasters that have occurred since the 20th century, there have been thousands of reasons to predict the end of the world. Yet, investing in stocks has consistently yielded returns more than twice as high as those from investing in bonds.
Viewing the stock market with this macro perspective, maintaining confidence and investing in stocks over the long term will definitely yield much higher returns.
On the other hand, heeding the pessimistic forecasts of news commentators and economic consultants, believing that a recession is imminent, and being frightened into selling all stocks to invest in bonds, will certainly result in much lower returns than maintaining confidence and investing in stocks over the long term.
Looking to pick stocks or analyze them? Want to know the opportunities and risks in your portfolio? For all investment-related questions,just ask Futubull AI!
Editor/KOKO
