(This is a guest post and may not reflect the thoughts and opinions of Old School Value)
Have you been paying attention to the financial media recently? If so, you should probably kick that habit.
A lot of investors follow the financial media in order to help steer their investment decisions. They look at news stories that highlight economic data or interview well respected pundits who claim to know what’s going to happen to the stock market.
It’s easy to see why.
Big name analysts and investors — the rockstars of our field — command a lot of respect among investors, and publications such as the Wall Street Journal and Forbes are nothing if not credible.
Add to that the number of people who post articles from these publications on social media and you end up with a lot of social proof and a strong pull to buy into the drumbeat.
It’s very easy to get sucked into basing your investment decisions on these “expert market predictions” and this is especially true when news reports correlate with emotional market movements.
The Attitude You Should Take Towards a Possible Market Crash
I recently got an email from a Net Net Hunter member who was concerned about a coming market crash.
I’ve been a member since May and love how the site has been evolving. I’m nearly finished constructing my net net stock portfolio but have been getting scared because of a couple recent reports of a coming recession……. What are you doing to protect against a recession and should I put off buying stocks or liquidate my positions? Doesn’t seem like a good time to get into the market…
Looking forward to your reply,
This type of attitude is common, even among those who’ve signed up for our free net net stock picks, but understanding this media circus trap has helped me profoundly as a long term investor.
When it comes to macro events, I operate under two principles:
- Nobody can predict what the stock market will do, so…
- basing your investment decision on market or economic predictions is a fool’s game.
Ultimately, no investor can do well over the long term by basing his investment decisions in any way on the predictions of financial publications.
While investors face a tsunami of predictions each and every year, most predictions end up being flatly wrong — they just don’t come into fruition. Those journalists, pundits, or publications that do accurately predict a market event are easily remembered but never seem to be able to repeat the feat with any degree of consistency.
Often times big name publications are making doom and gloom predictions at the worst possible times.
Don’t Sweat the Drop – Long Term Investors Triumph
So, how do I deal with recessions and possible market crashes?
The answer is surprisingly simple — I don’t worry about them.
Here’s the thing: A market crash or recession is guaranteed to happen sometime in the future. I just don’t know when that’s going to be.
Take another look at the performance of the NASDAQ, this time over a period of 20 years:
Over the past 20 years the NASDAQ has returned just under 500% despite major market volatility.
All an investor had to do to approximate the NASDAQ’s return over that period was to stay as fully invested as possible in a low cost NASDAQ ETF.
No market predictions were needed, you didn’t have to get in and out of the market at the right times, and you certainly didn’t have to worry about seeing your portfolio’s value cut in half.
All you had to do was hang on.
By contrast, basing your investment decisions on predictions found in the financial media would have meant committing financial suicide.
Over that same time span, you could have easily found yourself out of the market just when stocks were about to takeoff, missing out on great buying opportunities.
Even worse, liquidating your holdings based on news headlines could have forced you out of significantly undervalued positions at a loss… only to watch those same stocks rise back up to fair value as was the case in the depths of the financial crisis. In other words, getting out of the market would have caused you to LOSE money.
But before I get into the analysis, click on the image below to get the investing red flags that will help you detect potential blow ups. You’ll also get exclusive content and resources that we don’t share anywhere else.
Similarly, net net stocks have achieved their fantastic 20-35% average returns despite major market corrections or economic recessions. Academic studies which have tracked their performance have done so year after year, despite what the market has done.
All an investor had to do to achieve similar returns was put together a fully invested net net stock portfolio and then remain fully invested throughout the same period.
Maintain a Fully Invested, Well Diversified, Portfolio of High Quality Stocks
To deal with the uncertainty of a market crash, I simply fill my portfolio full of stocks of companies with extremely conservative balance sheets. To protect against the worst case scenario, I also make sure to buy only stocks that are deeply undervalued and don’t need access to the credit markets.
All of this ensures that my investments have the ability to survive deep recessions and that I’m not buying based on unsustainable valuations.
I’m not saying that my portfolio won’t sink during a market crash.
I think that’s inevitable.
The famous speculator Jesse Livermore characterized the general behavior of stocks almost perfectly when he wrote that;
[i]n a bear market all stocks go down and in a bull market they go up.
So long as the values of the companies that I bought are robust, I expect the bulk of my stocks to eventually rise back up to fair value, market crash or not.
Just take a look at how European net nets faired despite two major recessions:
In the long run, it is more important to be stocked full of great investment opportunities than it is to worry about getting out before the market plunge. It’s not that hard to spot good opportunities, after all, but it’s nearly impossible to tell what the market will do.
When it comes to my own investing, the stocks that pass Net Net Hunter’s NCAV Investment Scorecard have highly conservative balance sheets and meet the test of being fantastic investment opportunities, so I try to stuff my portfolio with as many of these high quality stocks as possible.
Take a Long Term View
Charlie Munger once said that if you can’t view a drop in the value of your holdings by 50% two or three times a century with equanimity, then you’re unfit for common stock investment and you deserve the mediocre returns that you’re inevitably going to get.
No matter what your sub-strategy is, profits in common stocks accrue to value investors with a strong temperament and an ability to see things within the context of eternity.
Don’t stress a 1 or 2 year period of horrible results, those periods are bound to happen no matter what you do, but you can survive them if you’ve invested in financially sound firms.
A far greater sin is dodging in and out of the market which will ensure terrible results.