Market rout : A test of our mental fortitude

The last few days of market routs in both China as well as stock markets over the world had seen trillions of dollars evaporated in air. This is a type of market situation in which big investors and fund managers fear most. Good and bad stocks were all bundled together and offered as a discount package. Fundamentals were thrown out of the window. There were no escape routes and everybody ran for the exit door.

While significant damage has already been done, it bags a further question – shall we sell out our stocks in anticipation of further slides or shall we hold on to our stocks and ride through the storm? It is a crucial question that requires a time-critical action amidst the volatile market. It is not a question of how good is our stock picks a few months ago or how lucky we were in selling a few weeks ago. It is really a test of our mental fortitude – whether to sell out or to hang on.

For those who have relatively small exposure especially those holding good blue chips. Generally, the blue-chips will regain its position after the uncertainty is over. In fact, some may even consider to buy in (now or perhaps a bit later) as this may be one of the rare lifetime opportunities. True, the gains may not be immediate, but why bother when we do not need the money. The potential gain is worth the wait.

Certainly, there is another group (a big group in fact), who want OUT irrespective of whether they suffer losses or still in the black. They just want out, and that’s why the market tanks! In this group, there are a portion of them who will vow never to be in the stock market again after suffering massive market losses. If you are in this group, just treat it like you had suffered some business losses and get on with life. Or else, the spectre will continue to haunt you and it would not be healthy both for you and your family.  (I had come across a person who mentioned that he became a good father after this life encounter!) Then, there is also another camp in this group who seeks to get back to the stock market when the storm is over or when the situation gets better. They are always on the prow to seek opportunities to buy into the stock market. If you are in this group, remember that you have to make right decisions twice. Firstly, you must decisively get out of the market while the market is reeling down, and, more importantly, you must get back into the market very timely. I say again, very timely. The reason is that when the market starts to turn, it is really very fast and powerful. It is going to be a stampede getting back into the market with the same ferocity just like everyone wants out when the market tanks. This BUY decision is very critical especially when our sell position was not exactly high and we have to consider and re-consider when to get back into the market. Let me say this – it is really not easy to time the market. It is like driving through a thick fog when we are not able to see what is immediately ahead of the wind-screen. Many people professed that they can sell out their position when the market is high (really how high is high??) and then buy back when the market is low. But the reality is that the market can always get cheaper and how low is considered as low. Even if they know that the market is low, the question is, will one have the mental fortitude to get back into the market? Our ego is always that we want to buy low. We waited because we hope to buy something even lower than what it is now. (That also explains why governments find it more difficult to curb deflation than to curb inflation). Such procrastinations can be very costly. Perhaps, when one reviews his position after the brawl, he may even asked himself why he had sold in the first place when his buy-back price was so close to the price that he had sold, just because he is worried about missing the band-wagon. Or, perhaps, he might even suffer a marginal loss when he bought back the stocks. In fact, this happens to not just retail investors but even big fund managers as well. That explains the market tend to over-swing when the market start to turn for the better.

Then, there is also a super brave group. THEY ARE PREPARED TO RIDE THROUGH THE STORM! Generally, this group consists of people who have some market experience and likely have seen the market ups and downs. The good point of this group is that they are able to separate money matters and other life matters. Therefore any market losses, generally, do not affect their private or family lives.  Personally, I think if we want to be a stock investor, we should bear at least a bit of this characteristic. We cannot win all the time. Even famous investors lost big at one time or another. We should not let the people around us suffer with us just because we incurred losses in the stock market. The fact that we are in the stock market means that we are prepared to incur some financial losses no matter how good our investing prowess can be. The danger, of course, is when the market continues to linger downwards over a long time, generally one year or more, and such that even some people in this group started to lose hope. This is when the maximum damaged by the stock market was inflicted. They suffered so much loss to a point that they lost hope and gave up their position. This is the stage when the famous investor, Warren Buffet, termed it as MAXIMUM PESSIMISM. Even a ‘long-term believer’ sells out of his position! This is usually also the stage when extremely wise investors come in to scope the good stocks that have been badly-battered and nobody wanted them. They buy at the lowest point and hold till the market becomes positive again. This is how wise investors become extremely rich. Their gain can be several times of their investments, which Peter Lynch termed as ‘multi-baggers’.  The irony, usually is that the market U-turn is usually very fast and unstoppable. This is a stage when big funds start to come in and retail investors were left out ending up ‘missing the boat’. Frankly, if you are the type who believe in technical analysis and has been working to confirm, double confirm and triple confirm the buy signal, I am quite sure you will ‘miss the boat’. The market is not going to wait for you. It is not just going up gradually. It jumps. By the time retail investors start to get into the market in a big way, the market index might have run ahead of the fundamentals of the prevailing situations. It is a very tricky situation – to buy or not to buy?

So, the point is your mental fortitude in this volatile market determines the level of calmness and how you react to the market situation. A crazy market does not mean that one has to craze along with it.

Be rational. Happy investing!

Disclaimer : The above does not constitute an advice for readers to buy or sell their investments. The contents are opinion of the author who has been in the market for more than 25 years, and who have seen many ups and downs of the stock market that have affected many people. It is just means of sharing his observation of the market phenomena. The contents are purely for private consumption only as he has no interest in readers’ stock investments.    

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.