With crisis comes opportunity! Here’s why you shouldn’t panic when the stock market declines… [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:
Welcome to “The Independent Investor!”
We’re excited to share with you another investing tip.
Every Wednesday, we publish articles about great investment strategies and insights. Our hope is through these, you’ll get on the path towards true financial freedom.
Today, we’ll talk about the fifth investing discipline of some of the greatest investors in the world.
Continue reading below and learn to capitalize on bull and bear markets when they arise.
Miles Everson
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
Peter Lynch, the former fund manager of the Magellan Fund at Fidelity Investments, once said:
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
What does Lynch imply here?
As an investor, a stock market collapse shouldn’t make you panic. It’s inevitable… and it’s happened in the past.
In fact, the stock market has always shown patterns of bull and bear markets. To be a disciplined investor, you must recognize these patterns, and adjust your investing activities accordingly.
As Shelby Davis, another great investor and fund manager, said:
“History provides crucial insight regarding market crises: They are inevitable, painful, and ultimately surmountable.”
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According to Professor Joel Litman, the bull market and bear market phenomena have been in effect for over 300 years of recorded financial history.
No financial market has ever been immune to these events. All stock markets have experienced drastic ups and downs that follow distinct patterns.
Before we dive deeper into this topic, let’s first discuss the origins of bull and bear markets…
“Bull market” refers to a stock market that has been rising; “bear market” refers to one where prices have been falling. In terms of individual investors, a “bull” is someone who expects stocks to rise, while a “bear” is someone who acts on the assumption stocks will fall.
Why were these animals used to describe markets in finance?
Historical records suggest all these originated with a proverb that warns against the temptation to “sell the bear’s skin before one has caught the bear.” It’s similar to the concept of counting your chickens before they hatch, but with a lot more gore.
By the 18th century, the phrase, “bear-skin jobber” became a pejorative for sellers, especially those who actively bet prices will fall. The term was popularized during one of the world’s first huge market crashes, the South Sea Bubble of 1720.
There’s less historical evidence for the rise of the term, “bull,” but it seems to have been chosen for its symbolic opposition to the bear. As British poet Alexander Pope wrote in 1720:
“Come fill the South Sea goblet full;
The gods shall of our stock take care:
Europa pleased accepts the Bull,
And Jove with joy puts off the Bear.”
This 18th century animal imagery caught on, and since then, bulls and bears have been included in stock market terms.
Fifth Investing Discipline: Capitalize on Bull and Bear Markets When They Arise
Sir John Marks Templeton launched an active stock-picking fund in 1954. By 1999, Money Magazine said he was possibly the best stock investor of the century. Why?
He was famous for keeping things simple, and for reminding other investors to “buy low, sell high.” He said:
“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”
Take a look at these stock market scenarios…
During the market panic of 1907, stocks collapsed over 50%. Prior to that year, in 1905 and 1906, stocks showed dazzling upside, signifying it reached a “euphoric” state.
That same “super up” and “super down” pattern happened before the Great Depression began in 1929. In the year 2000, the phenomenon happened again, with the Internet and technology craze.
A few years later, the stock market had another bull market through 2007, just before collapsing in 2009 with the Great Recession.
What do these instances show you?
Bull and bear markets have always been happening since hundreds of years ago… and understanding these patterns is necessary to buying low and selling high over long periods of time.
Unfortunately, some investors—particularly those who don’t follow a timetable discipline of investing—get caught up in the ups and downs of the market. The result?
They pour money into stocks at the peaks of the stock market, then later refuse to invest exactly when they ought to—at the bottom.
As Seth Klarman, Chief Executive and Portfolio Manager of the Baupost Group, said:
“Buying high and selling low is a recipe for disaster. Refusing to take part in stocks when at their absolute lowest is a horribly missed opportunity.”
With Crisis Comes Opportunity
It’s during bear markets that big opportunities arise. Investors who are able to buy at a stock market bottom can sit back with passive investment funds, and enjoy enormous returns.
Example: Those who invested in simple U.S. funds in 2009—at the time of the Great Recession—saw their funds rise as much as 300% through 2019.
This supports Professor Litman and other great investors’ claims that out of crisis comes opportunity. A down market lets you buy more shares in great companies at favorable prices.
… and if you know what you’re doing, you’ll make the most out of your money during these periods!
Besides, disciplined investors wait for bear market opportunities and pounce on them when they show up. As Berkshire Hathaway CEO Warren Buffett said:
“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”
We hope you learned lots of investment insights from this investing discipline!
Always keep in mind that there is nothing new on Wall Street. Whatever happens in the stock market today has happened before, and will happen again.
So, as a disciplined investor, be wary of adopting a crowd mentality—panicking at the onset of a market downturn and selling your holdings when you should actually be buying stocks.
Instead, recognize the patterns of the stock market and stay the course to avoid making reckless decisions about your finances.
Stay tuned for the continuation of our discussion on the 5th investing discipline!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“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.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
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To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Cheers,
Kyle Yu
Head of Marketing
Valens Dynamic Marketing Capabilities
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