You have to be able to control yourself; you can't let your emotions get in the way of your mind.
-- Warren Buffett
Emotions can make us do funny things. Whether we're publicly serenading our beloved or cursing out our best friend, emotions can make us do things no rational person would. Unfortunately, in a declining stock market, emotions can be a rational investor's worst enemy. Here are a few ways Fools can cope.
It's not me, it's ... you!
I think we've all experienced that sinking feeling as Mr. Market trashes our carefully constructed portfolios. But investors suffering from such "stock market blues" should consider a few things:
- Stock market fluctuations are the collective result of millions of people buying and selling. Human beings are emotional, and sometimes they get discouraged and sell. Just because you're temporarily on the short end of that selling wave doesn't make you a bad human being.
- You're not alone. No one, and I mean no one, can consistently predict stock market tops and bottoms. George Soros, who once made $1 billion in a single day, allegedly is wrong much more often than he is right. (He simply has a knack for betting bigger when he's right.) Warren Buffett's investments in USG
(NYSE:USG)and Washington Post (NYSE:WPO)initially tanked after he bought them, and other holdings like American Express (NYSE:AXP)and ConocoPhillips (NYSE:COP)haven't been spared in the recent downturn.
Misteaks ('cause you eat them)
Once investors get past that initial moping stage (I hate the stock market!), they can concentrate on learning not to repeat the same mistakes. For example, I'm only slightly ashamed to admit that I once lost 8% of my entire portfolio in a single day. I put roughly 30% of my portfolio in a merger arbitrage situation that was a "sure thing." Whoops. Needless to say, I learned a very valuable lifelong lesson in risk management.
I find that periods of adversity are also a good time to do some serious fine-tuning. When my portfolio is up 20%-30%, I'm usually feeling so content with myself that I forget that investing is a nonstop learning process. Only when my performance is flat or down do I become ultra-focused on seriously questioning and improving my investing process. Ideally, an investor should be in a constant state of self-improvement, but I'll take it when I can get it.
From hunted to hunter
The vast majority of investors suffer during a stock market decline; however, some people deal with it better than others. Invariably, one class of investors will sell at or near the bottom, and another class of investors will buy. Warren Buffett likes to say that if you're at a poker game, and you can't figure out who the patsy is, it's you.
I believe that one of the keys to not being the patsy is to view stock market declines as a possible opportunity, rather than a harbinger of doom. Keep in mind that you shouldn't be contrarian for its own sake, any more than you should drive on the opposite side of the road just to be different.
Instead, investors should rationally scour a declining stock market, staying within their circles of competence, to find individual businesses selling at far less than their intrinsic values. For example, take US Bancorp
Does it really make sense for the market to value US Bancorp's stock at 11 times earnings, as if it were a mediocre bank at the mercy of the interest rate curve? I don't think so. If US Bancorp's stock gets much cheaper, I'll view it as a buying opportunity, rather than a time to sell. In the long run, buying great stocks on the cheap is one of the best way to beat the stock-market blues.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool's disclosure policy has a guitar named Lucille.