“Your lifetime results as an investor¹ will be mostly determined by what you do during wild times.” – Morgan Housel
Equity markets usually overact in both directions: at the top of bull as well as at the bottom of bear markets. This is what Morgan Housel means with the wild times: how will you behave during the times at those points. As always, easier said than done. The biggest problem with the statement is that you never really know whether you’re already at the top or if there’s already the bottom. Additionally, both the “top” and the “bottom” may last many years. In short, market timing is practically impossible.
It took me 6-7 years to fully recover (God helped me since I did recover without taking any pills) after I last experienced wild times. Financial storm hit in 2007. Stock portfolio I managed then dived like a stone plummeting from a 100 foot waterfall. As I was inexperienced but at the same time a very committed portfolio manager, I took portfolio losses personally and I …. I had lost all hope in investing and was telling myself that all my education and experience was useless because I simply did not know what to do. Add a personal divorce to this situation, and my financial and psychological well being rapidly deteriorated. I found out about the seriousness of my condition when I left a cute girl I invited for a date in the middle of the movie and headed to the nearest hospital. I felt that my heart for no reason is about to stop ticking. Diagnosis at emergency was short and clear – a panic attack. The lovely nurse said: mind what’s in your head my boy, don’t press yourself too much. But I pressed.
Above I highlighted one of the possible outcomes if one happens to experience wild stock market moves, especially when markets are falling. The sense of panic during such periods is felt everywhere – in the media, on TV, among professional investors, amateur savings accounts, on the Wall and the Main street.
I’m sure that the majority of us care about personal financial wellbeing. A big part of the wealth creation process is investing (another very important aspect is saving). Morgan Housel in his blog and recent book “The Psychology of Money” has outlined many original and very valuable thoughts and behavioral hacks for the investor, but the quote about investor’s behavior during wild times I find one of the most important. But one thing is left out in the quote: what exactly should we do during wild times in order to be a satisfied lifetime investors?
With age I realize more and more that in seemingly every discipline in order to be successful the personal behavior together with proper work habits and routines are more important than the deep knowledge of the subject itself. I can confirm this in disciplines such as investing, sports, and, more recently, writing. In investing², the appropriate behavior to have success is that you wait; in sports, that you move; and, in writing, that you write.
Core investment principle: once invested, you stay invested no matter what and patiently hold your portfolio. A decade, at least.
Assume the market falls, as in 2000 or 2008-2009: what does it really mean to behave rightly during bottom wild times? The easy answer is you don’t sell. You stay invested.
Going back to my personal experiences in 2007-2009, the portfolio recovered much faster than my psychological condition did. In the next 4 years it’s value tripled since the lows in 2009. Because we stayed invested.
Never sell or stay invested concepts are true as for bull and bear markets, so for both unskilled and experienced stockholders as well.
Main lessons I learned during the last financial crisis: First, don’t do it. I mean: don’t panic, it’s just money. Secondly, it shows how it is difficult to behave rationally when everyone is panicking, so it is important to have a roadmap to read and to hold on to during wild days; Thirdly, markets always recover. Always.
Financial notions such as buy&hold, never sell or “you earn returns while you wait, not when you buy or sell”, all are well known and, most importantly, true. And they are valid as for experienced investors, so for the beginners, too. As the way to the top or bottom could be very long, don’t fall into the traps and sell because of the false reasons such as:
I already made lots of returns, so let me book profits and re-enter later;
I anticipate a huge market correction;
Some other stock is cheaper;
I rebalance my portfolio;
I switch to another asset class or stock;
“Others” are selling.
Why are these false reasons? Because they are partially about market timing, and partially about “correct” selling decisions, which needlessly interrupt the compounding process of your investments. Avoiding false reasoning will help you not to miss bull markets (in 2010 many said don’t buy stocks because the returns in the coming decade will be in low digits; in 2021 the same people say the market is overvalued); and it gives you guidelines for your behavior as an investor when things get scary.
During prolonged bear market when you look around and see or hear the news: _” The market “is displaying one of its worst traits with a herd mentality, and investors have an appetite for feeding on fear; Gediminas is in panic; the markets are down 50%; the world is ending; the unexpected event will vaporize all business models””._ and you will still have enough guts to buy new investments, then and only then you will behave in a way Morgan Housel expects you to behave during the wild times. Stay tuned, as such opportunities will emerge just 3-4 times in your lifetime.
¹If you are an unexperienced investor I assume that your investment is well diversified, such as a broad index fund;
² “Investing” is referred to investing in stock market