No doubt a lot of you, scarred by the GFC or the 2020 pandemic-inspired drop in the market or by the current sell-off, are worried about a more significant market correction. It’s no fun investing in 'fear' and if that’s you then let me tell you about fear and in so doing rid yourself of the constant worry that the stock market is about to fall over and destroy your financial expectations.
Understanding and welcoming fear
Let's make a few points about fear.
First, there is always, always, always something to fear when to comes to the stock market and fear is good because it’s the fear that creates opportunities. Rather than avoid fear, you should welcome it. It is in the grip of stockmarket fear and exuberance that the most money is made in the shortest timeframe.
Second, you should also understand that when fear starts, we will perpetuate it. Fear is great for us, for the financial media, the brokers, the financial planners, the fund managers, for financial advisers, in fact it’s great for the whole finance industry. Some commentators make a living out of fear, like Nouriel Roubini or Marc Faber with his Doom and Gloom report. Why? Because fear triggers insecurity which drives investors to us. Fear is the sheep dog of financial services. It rounds up the sheep so we can shear them.
Third, fear is also a powerful magnet that attracts eyeballs and in a competition for clicks, when investors are at their most fearful, the clicks and eyeball numbers explode. Everyone wants advice and we will provide. Advice is a Trojan Horse for commercial purposes, much more effective than common cheerfulness.
Click bait in its natural form starts with the words “5 things…”. To capitalise on that, we in the financial media chuck in some of the top click bait keywords, and then, if the glorious moment (as now) presents, we throw in some fear. The most commercial headline includes keywords “Warren” and “Buffett” and a small sprinkling of fear, and it goes like this:
“5 reasons Warren Buffett thinks the stock market will crash”
Publish and wait for the clicks.
The bottom line is that fear is just part of the great game that is the stockmarket (or any market). It creates the lows, it creates the best opportunities and for the finance industry, it is gold. Whether it is a broker looking for an order, a media person looking for attention, or a financial planner looking to convince a client that they need them, fear gets more traction than optimism. Fear gets attention.
So when the stock market drops 5% in a day there are a few things you don’t do. Don’t join in. Fear makes you vulnerable as an investor. It distorts your normally objective state of mind. If you get fearful when the market loses its head, you become part of the herd. Far better you recognise it for what it is: an emotional ‘moment’ in other people's minds. Rather, think about how you can exploit it. It will vary depending on the sort of investor you are and the sort of risk appetite you have.
A plan of action when fear hits
When the market loses its head in fear:
- Stay cold, objective, logical. Look down on the fear. Emotion will not help you, it will cost you.
- Accept what your shares are worth now. Don’t dwell for a moment on the highs and how much you were ahead. The highs are gone and there’s nothing you can do about it. Anchoring yourself to yesterday’s prices will deliver nothing but regret and a feeling of stupidity. Look at the bottom of the spreadsheet. That’s what you’re worth. Accept it.
- Get excited. The market only presents great opportunities occasionally. One is coming. It is from moments like these that quick money is made.
- Take an informed guess at what you think is going to happen next. The only thing that matters is what’s going to happen not what has happened.
- Decide what to do, if anything. Understand that no-one knows. Do your best. Just decide and live with it. Accept the outcome right or wrong.
So, my thought process in the current sell-off has gone like this:
- Take 10 seconds. Tiger Woods says you are allowed 10 seconds to express your emotion after a golf shot, but that's all. Take 10 seconds. It's good for you, but there’s nothing to be done about the past now. Time to move on and decide what to do next.
- Identify the core issues. I read a lot and quickly (it’s pretty obvious) identified the core of the issues for the correction. Macro stuff. In this case inflation, interest rates and the fear of a US recession, with a sprinkling of China lockdowns and Russian risk.
- Decide if it’s a blip or a trend. I made an assessment of whether the main issues are likely to persist or turn on a sixpence. I decided this time they were more likely to persist.
- Do something or decide to do nothing. I’m good at selling, which I did this time. You should learn to do it. It's cathartic. You wake up the next day hoping the market collapses rather than fearing it will. It's empowering having cash and being ‘ready to go’.
- Take it day by day until the bottom. Now the game is to watch and wait for ‘Peak Fear’. The market will bottom one day. It could this week or it could be in a year. You must take it one day at a time. Wake up every morning and react. There's no predicting it. I know I’ll make more money in the recovery from the bottom, and more quickly, than I lost in the last few days. If I can get it right, it will be fabulous.
And that’s how you approach this moment. With the intention to exploit everyone else’s fear.
I believe you can time the bottom. Commentators say it is impossible so they don’t have to do it. For financial professionals, it’s easier handling docile 'buy and hold' clients who can be convinced that timing can't be done.
Embrace the fear
You should welcome corrections and other people’s fear. The most exploitable moments of the market are the fabulous exponential, irrational, exuberant bits at the top and the most fearful, despondent, capitulations at the bottom. They are the bits, the extremes, the opportunities, that make the market worthwhile. Those extremes, those moments of stupidity, absurdity, farce, ridiculousness and nonsense are brought on by other people’s irrational fear and irrational exuberance. You should expect them, look forward to them, and use them, not avoid them.
A good investor watches and exploits the herd. Let that be you.
Marcus Padley is the author of the daily stock market newsletter Marcus Today, see marcustoday.com.au. This article is general information and does not consider the circumstances of any investor.