A price drop in a good stock is only a tragedy if you sell at that price and never buy more. – Peter Lynch, former manager of Magellan Fund, a US based mutual fund
When the market is up and reaching all-time highs, everyone looks happy. Who wouldn’t put a smile when his portfolio is getting greener?
It’s a different story when the market is down and you are down as well. You might likely be troubled.
Just like during earthquakes, an investor is likely to panic and be confused. Most would run away from the stock market. Is this the right emergency measure?
When the party ends
The Philippine Stock Exchange Composite Index (PSEi) just achieved its all-time high on March 6 at 7,861.33 points. Some ‘experts’ even predict that it could go higher.
Hence, for most investors being troubled is unlikely now. Let me remind you, however, especially the new ones in the market, that it will not always be up. It never has.
The market has been up for six successive years now. I don’t have a clue as to whether it will still be up at the end of the year or not. But the party will eventually be over, soon. I just don’t know exactly when.
Just recently, a guy asked me what to do with his shares of a company that’s down, even if the market is up, since he bought them. This company is one which I don’t and won’t put my money into. It’s in a highly competitive industry. But he’s in it.
If others have easy advising an investor like him, I find it so difficult. I have hard time saying ‘sell’ or ‘buy more.’ It’s his money that’s involved. I may be part of the blame when his expectation is not met.
It would be doubly difficult if the market is down and he down. I might be forced to advice a guy to sell at a big loss. It would definitely pain me to see him lose money.
But if you happen to invest in a wonderful business and the market is down, I am calm and could advise you according to what I learned from successful investors, especially Buffett.
Let’s fast forward and assume that the market is down and you are troubled. What shall you do?
There will be times when you buy shares now and the next thing you know your shares are down; or you may realize later you bought shares at a higher price.
I tell you, when you are down, many thoughts come into your mind. ‘I made a mistake,’ ‘I bought stocks at expensive price,’ ‘I should not have listened to my broker/adviser,’ ‘I entered at the wrong timing,’ and the like.
And many investment advisers will tell you to sell to cut losses!
To buy more shares during a time when everyone else is selling is like “are you crazy?” An expert suggests that when you incur 7 to 8 percent loss, you should sell to cut losses.
Here is my view: if a wonderful company that you own becomes less expensive, would you not buy more shares? If you happen to buy say at P10 and it went down to P7, would you sell? Why should you sell when prices become so cheap?
So, assuming you bought that great business at any price and you are down, don’t panic. Don’t sell, buy more! It’s time for you to have more piece of the pie.
Down markets do happen not to scare you. It’s rather an opportunity for you to load up. This is, by the way, what most investors are missing. Most are like Chicken Little. They always see danger and run scared.
Call a friend
To whom do I go when I’m down and confused? To Warren. Allow me to let the billionaire speak:
“There’s no reason we should become fearful if a stock goes down. If a stock goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.”
He further stresses,
“A market downturn doesn’t bother us. For us and our long term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short term investors and market timers is a correction not an opportunity.”
So, when you’re down and troubled and you need a helping hand, you can count on this guy. He’ll come running with his investment principles.
One last thing, Warren says,
“With a wonderful business, you can figure out what will happen; you can’t figure out when it will happen. You don’t want to focus on when, you want to focus on what. If you’re right about what, you don’t have to worry about when.”