Every single second, people are predicting a market crash. They always find new reasons: tech stock overvaluation, the Fed, inflation, quantitative easing, quantitative tightening, interest rates, China, Russia, etc. Eventually, they will be right, of course, although it can take years. At that moment, they will pound their chest like a gorilla that just got an overdosed testosterone shot. As they say, even a broken clock is right twice a day.
While I didn't really like reading Benjamin Graham’s classic book on value investing, The Intelligent Investor, there are a few good concepts in the book. One example is the classic story about Mr. Market, who is sometimes manic and sometimes depressive, but never something in between, normal.
When Mr. Market is manic, you can see that in the behavior of analysts and investors. After all, together, they form the body of that imaginary Mr. Market. If there are mediocre earnings, and Mr. Market is hyped up, you'll see that the strong points are highlighted. When Mr. Market is depressed, you'll see that analysts and investors will always find something to frame even great earnings in a negative way.
The bottom line is clear: don't panic, don't sell off on irrational market moves. Do you want to see some evidence? Of course, if you are just a bit like me. This is from a Charles Schwab blog post:
When the market is in free fall, it’s tempting to flee to the safety of cash. However, pulling out of the market for even a month during a downturn could seriously stunt your returns.
Market timers always sound smart. They always claim to be out around the top and get back in near the bottom. Yeah, right. Staying fully invested through the bear market trumps going into cash. Just look at this graph.
Do you see why sounding smart is often not really smart? Of course, there will be exceptions, but I think the lesson is very clear: stay invested in the greatest companies as long as the fundamentals don't change.
How do you see the difference between something fundamental and a real problem? If it's one stock, you should look very carefully. If it's (almost) all of your stocks or a whole category of stocks that is out of favor, you can usually lean back because it's just market sentiment. This happens every now and then. Sometimes sentiment changes fast; sometimes, it takes a few years. Either way, the wheat will be separated from the chaff during these times.
Especially for newer investors, this could be really shocking and some might ask themselves if you did the right thing investing in high-growth stocks, like we do at Potential Multibaggers, or maybe even investing at all. Don't worry.
I know some of you started investing recently, sometimes just before the market collapsed in 2021, and haven't sold anything. Now that the market has recovered somewhat, many are still at a loss. It’s one of the reasons I have always tried to convince people of dollar-cost averaging.
But if you haven’t sold, you are special. Most newer investors panicked and sold, many around the bottom in October. Usually, I don’t get too many snarky comments on Twitter and I try to avoid giving them myself, which often helps in reducing the number you get. But around that period, negative replies on Twitter and negative comments on my Seeking Alpha articles skyrocketed. I guess it was a good counter-indicator. The Multis, who subscribe to my service Potential Multibaggers, know I was adding more than usual during that period, what I called my “dollar-cost averaging on steroids.”
To those who panicked: don't worry too much either, just know that you will have to train to hold on in such harsh times. The next time, prospects will sound dire again, just like they did now.
Knowledge is your shield against the enemy: your emotions. If you know a company very well, you don't panic as easily. You should know that the best stocks always come back to go higher. Will that be all my Potential Multibaggers picks? Of course not. But many will and should let you outperform over time. Nobody hits with a 100% ratio. Losers are inherent to the game, no matter how you play it. Some try to beat the market by minimizing losers, and that works. What also works is just taking the losers and trying to maximize the winners.
The great thing about investing is that you don't have to hit 100% to win it big. Even with 50% winners (or lower), you can have a great portfolio, beating the index by wide margins over time. The reason is the asymmetry of risk: stocks can only go down by 100% but they can go up by 1000% and much more.
Think of this investor when you are considering selling:
There will be a moment at which the market works against you, and a majority of analysts and market participants will be yelling then that they had been right from the start but they were wrong all the time. They have missed huge gains. Let's go to this Value Digger, for example:
Over the last 12 months? This comment is from 2021, and then it was close, but growth stocks still outperformed value stocks by a small margin. But it was not a random starting point. It was totally biased. This is the last 12 months right now
You might think that this is biased as well, as growth has seen a great return in the last 6 months. You can see that value outperformed until mid-March.
But how about the last 12 years, which is much more important to me?
And over the last 5 years, which I see as the minimum investment period?
Cherry-picking your time frame shows a weak argument. You can prove anything with picking very precise dates.
That doesn’t mean I want to prove growth investing is better than value investing. I’m a firm believer in the fact that everyone should invest in the way that fits their personality. For growth investing, you have to have patience, equanimity, and calmness. After all, the volatility is much higher. Most investors love the upside volatility, but can’t deal with the negative volatility. Both are inherent to growth investing, though. The upsides and downsides are always exaggerated. As I said, that Mr. Market story of Benjamin Graham is always applicable.
Maybe value investing, with much smaller up-and-down swings, fits your personality better. Or you like the combination of both. That’s great as well. Just be yourself, in life and in investing and don’t let others tell you what to do. Follow your own path.
The reason why I wanted to show this is how many voices in investing work, how negative they are and, at the same time, how they pound their chest during downturns.
They are not my people. I ignore them and stay the course I have decided on.
In the meantime, keep growing!