“Selling into a panic is a bad idea.” Apply this time-tested investing strategy during geopolitical events! [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
I believe regardless of the industry we’re in, we must learn how to invest. This is a great vehicle that will help us achieve true financial freedom.
However, this financial activity is not immune to risks. Your investment portfolio could be in danger especially when you panic and use your intense emotions to make a decision.
That’s why stock market pattern recognition is important. This will help you stay still and avoid making reckless decisions that won’t do you any good in the long run.
What can you do to strengthen your pattern recognition skills?
Continue reading below to find out.
Miles Everson
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
Earlier in March 2022, Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, was in Brussels, Belgium.
During his stay there, he mentioned that the capital city was busy especially with the ongoing Russia-Ukraine crisis.
Even in the hotel where he stayed in, he was aware of the NATO officials flowing in and out of meetings regarding the “largest war in Europe since World War II.” They even requested that the hotel’s restaurant open an hour earlier to accommodate them before each day’s meetings.
… and while all these were happening in the Belgian city during that time, Professor Litman said he was also busy receiving text messages and emails from clients and friends who were asking him to react about the crisis.
In fact, one of his friends messaged him, concerned that a major European war would spell D-O-O-M for the market. That friend was asking Professor Litman how much he should sell.
Professor Litman said that’s an understandable yet knee-jerk reaction. Much like any other investor, that friend hears nothing but bad news from the financial media’s echo chamber of sensationalizing emotions.
As a result of such news…
Investors, especially the new ones, often make the mistake of selling into a panic without first understanding the market’s patterns during these periods!
See the effects of sensationalized news from the financial media? It causes people to invest emotionally, which is a BIG NO-NO in wise investing.
Sure, it may feel counterintuitive to not unload some stocks at a time of geopolitical conflicts. However, data from many years of research show that investors should buy into a panic like this—not sell into one.
Here’s why…
Historically, conflicts show a quick recovery when panic sell-offs occur. For Professor Litman, the best decision to make if you’re long in a downturn would be to continue to stay long. On the other hand, if you sold some of your stocks ahead of a meltdown, then stock market dips are times to buy back in, not a time to panic even more.
Sell-offs Driven by Geopolitical Events are Regularly a Buying Opportunity
Professor Litman says the total days required for the market to recover from a panic sell-off are amazingly short. He saw more data to back it up, and that gave him more confidence in his advice.
Here’s one of the examples he mentioned:
As shown on Ned Davis Research’s chart above regarding major geopolitical crises over 6 decades prior to 2001, it only took an average of 6 months for the market to recover. While there were dispersions during that time, the stocks managed to trend higher after the crises, thanks to general economic tailwinds.
[General Economic Tailwinds: These are the factors and events that help increase growth or cause positive effects on profits and revenues.]
Meanwhile, when the market reopened following the 9-11 terrorist attacks, the stock market dropped 18% lower than it was on September 10, 2001. However, within 6 months, the stock market was trading at over 10% higher than when it closed before the day of the attacks.
See? The data on these past geopolitical events show that it doesn’t take long for the markets to recover after such crises. But, if you’re still not satisfied…
Here’s another example from a different research company:
The chart above shows LPL Financial’s stock market reaction data on past geopolitical events from 1941 to 2020. Let’s focus on the Pearl Harbor Attack in 1941…
Professor Litman says after the bombing of Hawaii’s military bases and the entry of the US into World War II, there was a panic sell-off. He states it was an understandable reaction because at that time, Americans weren’t watching a war play out half a world away; they were jumping into the war themselves.
… but even during that terrible situation in the country, Professor Litman says the market still managed to recover to its normal levels in just 300 days.
As for every other geopolitical event in the chart, he states the recovery from the panic sell-off was relatively swift. It only took 22 days on average for the market to bottom from the event and 47 days on average to fully recover.
These recovery times show there’s no reason for investors to panic about whether or not they should sell some of their stocks during times of crises.
—
So, now that you know you shouldn’t panic because of current headlines, how should you react to the effects of the Russia-Ukraine crisis on the stock market?
You look back on past data about other geopolitical events in history—similar to what we did above!
Professor Litman says this will help you understand why this situation is a compelling buying opportunity for you as an investor.
BUT!
Let’s not dismiss the fact that the conflict is terrible for the two countries currently at war—for Ukrainians, the senseless human loss, and for Russians, the severe economic maladies because of a war many made clear they don’t support.
However, in the investing perspective, the conflict isn’t something investors should worry about too much because history shows the markets are adaptable to such geopolitical situations.
The bottom line?
Avoid reacting negatively or panicking whenever a situation causes the markets to dip temporarily!
The reality is if you follow the data and a sound process, and you also recognize patterns in the stock market, you’ll know there’s no reason to sell at a low.
Time and time again, there are investors who easily panic in geopolitical crises… but history has shown that the best thing to do is stay the course.
We hope you find today’s investing tip helpful!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
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“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
LITERALLY.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
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Hope you’ve found this week’s insights interesting and helpful.
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Kyle Yu
Head of Marketing
Valens Dynamic Marketing Capabilities
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