24 August 2015, Black Monday. The SGX and other indexes around the world plunged steeply. The STI ended 127.62 points or 4.13% lower to 2843.39. Singapore Stocks were falling by as much as 7%-8% in one day. The Dow Jones fell by 586 points, or 3.56%, to 15,871 – a drop of more than 13% from its record high reached in May. Social Media was abuzz with discussions about this fallout.
How far will it fall?
What should we do?
What stocks should we buy?
What stocks should we sell?
There were also some who lamented about the pain of paper losses. And there were others cheering for this long-overdue correction with glee. Some just watched the action and sighed about how they got no money to buy shares.
Although I am still considered pretty new in investing, ( I started in 2010, after the subprime crisis), I would like to share some advice from gurus and from my own personal experience.
1. Keep Calm and Invest On
Before you even start investing, you have to accept the fact that market corrections will happen. Do not be worried if you get caught in it. Just accept it as part of the game. If you cannot stand a correction, you probably shouldn’t be investing in stocks in the first place. Sure, it’s easy to say that you can keep calm in a correction, but it’s a whole different story when you are experiencing one. Most people will feel a sickening feeling in their gut as they see their portfolios drop by 25-50%. They will feel demoralised or discouraged and their brain will start churning out negative thoughts that eventually forces them to sell.
When you get that kind of feeling, remember – you are holding on to shares of actual businesses. But, that fact is easily forgotten when you get caught up in the flashing red numbers on the index, the scary news headlines, the collective freak out of the herd… Remember you are holding actual businesses that own assets that generate money!
Let’s put things in perspective. You own a property. Your property has value because it is an asset that can be rented out. Your property probably has a valuation pegged to it based on the rental it can fetch and a host of other factors. Let’s say your property is worth $350k, what would you do if someone came and offered you $150k to buy it?
You chase them away and tell them not to waste your time!
It’s the same thing with the stock market. You are owning shares of actual businesses (assets that generate money). If a group of people came up to you and all of them gave you low-ball figures to buy your business, you would ignore them too!
In a market correction, everyone is offering you low-ball figures to pressure you to sell. Ignore them. Turn off the screen. Stop looking at your portfolio. Don’t be suckered by lousy offers for your shares!
2. Do not get lured by cheap prices
If panicking is on one end of the spectrum, getting too excited about falling prices should be on the other end. Do not get lured into buying cheap stocks other than the fact that… they are cheap. You will be like an auntie going into a shopping mall and buying a whole lot of crap … only to come home and realise that… they are crap!
Valuation of a stock should just be a factor in your decision making, one which most people, (including me), are probably not very good at. Other factors include – Business model, management, industry tailwinds/headwinds, competitors, economic moat, etc. It’s very tempting to just snap up stocks in a rush just because of their cheap prices. But before you do so, perhaps you should take a step back and ask yourself:
How strong is this company?
What role does it play in my portfolio?
How much money do I want to invest in it?
Cheap stocks can become cheaper. Why waste your money buying crap when you can buy high-quality businesses?
3. Pace your buying activities
This point is more like a reminder for myself and also for others who have itchy fingers. When I look back on my buying activities leading from the past few months till the correction, I realised that I have been buying up stocks at a very fast pace despite gurus advising me to slow down or buy in smaller lots. Now when the correction comes, I look at my bank accounts and realise that due to unforeseen business expenses, my warchest is actually smaller than I thought! Such are the drawbacks of living with a volatile and unsteady income.
Hopefully, by reading this, you won’t make the same mistake as me. I could have gotten many of my stocks at a better price if I had just spread out my buys across a longer period of time, and in smaller portions.
*Note to self: Investing is a marathon, not a sprint!
4. Add on to your winners
Your winners are winning for a reason. It is probably best to just buy the stocks in your portfolio that are consistently reporting good financial results and have good future prospects to boot. Do not value-average down on your losers. Again, they are probably losers for a reason too. It may also be good to take note of your stock allocation. Unless you are super confident in your stock or you have the foresight of Warren Buffet, do not over-concentrate your allocations. Spread them out and diversify. For me, I am not comfortable adding to a stock that consists of more than 20% of my portfolio. If it grows, let it grow. But I probably would not add anymore to it unless I’ve got a very good reason to do so.
5. Opportunities are aplenty
It’s time to get aggressive in a bear market. There are so many opportunities out there. Lower valuations make stocks more attractive for the buyer. You can now be one of those low-ballers trying to buy up stocks from suckers who sell it off desperately in a panic. You probably have a watchlist of stocks that you monitor from time to time. Now is probably a good time to take action!
In a bear market, you should be greedy!
6. Don’t try to catch the bottom
It’s very tempting to try to buy a stock at the lowest price that the market can offer. However, it is probably nuts trying to predict what the market will do. For me, (and you can try this too), set some target prices for the stocks in your watchlist and click the buy button when it drops to that price. This would help to automate your decisions in a falling market. Sure, you can wait or haggle for the price to go lower. But as Warren Buffet once quoted, “If you wait for the robins to sing, spring will be over.”
7. Think Long-Term
Since, we do not know how long a bear market can go on for, we might probably see our stocks languishing lamely for long periods of time. Focus on the fundamentals of your business. If the business is getting better, making more progress, raking in more cash, then you should be happy if its stock price is still low. You should probably consider adding more to your portfolio! An easy way to make money from stocks is to buy, hold, sit still, and let the business run its course. If you have a time frame of 10 years in your mind, you will find that this correction would probably not be so significant…10 years later.
Good Luck to All of You! Happy Investing!
How do you stay cool in a market downturn? Share your advice below!
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