I don't know about you, but frankly, looking at my portfolio is not one of my favorite activities right now. Since the end of June, my port is down 31%. Wow, until I wrote that sentence, I hadn't actually calculated it, I just knew it was "a lot" -- and, unfortunately, it is.
It doesn't matter if you're a veteran investor or just starting out, that kind of performance hurts. So, what to do about it? Well, if you're snowbound like I was earlier this week, may I strongly suggest having your cat sit on your lap and purr? That sound alone should be enough to make anyone feel better.
But what if you don't have a cat? Or if, even after a session of purr therapy, you still cringe looking at that loss? What then?
Well, frankly, I think this is a great time to be investing. And if you're new to the market, you're truly lucky.
No, no. Think about it.
1. A painful but valuable lesson
First off, you're learning a valuable lesson: Stock prices do not go up all the time. And you're learning that at the beginning of your investing career.
I myself learned this with my very first purchases: Intel on May 2, 2001, and Cisco the next day. Right in the middle of the dot-com meltdown. Great timing, huh? I ended up selling Intel at a 50% loss and Cisco at a 35% loss, both within two years. Nice introduction to investing!
But that lesson -- "stock prices go down, too" -- has served me well, and I believe it's helped me become a better investor.
For one thing, I learned that, no, I am not a genius. Everything I buy will not automatically go up in price, something that I might have thought instead if I had started a few years earlier while the dot-com bubble was inflating.
For another, it taught me to look more carefully into the companies I buy. Those two were big names in tech and of course they (and, by implication, their stock prices) were going to do well. As a new investor at the time, that was pretty much my thesis for buying. If the prices had soared instead of soured, I wouldn't have been motivated to learn more about investing, nor become more rigorous in my thought process for buying.
2. Classic advice becomes timely advice
Second is the saying "buy low, sell high." You've heard it, right? Well, you are being given a golden opportunity to buy low right now. Or at least lower than where things were a few short months ago. Don't squander it.
It amazes me that for many people, the only thing in the world they prefer to pay a higher price for is a share of stock, and they get all bent out of shape when prices fall. Warren Buffett wrote about this in what I call his Hamburger Theory of Investing.
In his 1997 chairman's letter to Berkshire Hathaway shareholders, the Oracle of Omaha wrote:
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
Falling prey to those counterintuitive impulses is why so many fail at investing.
3. The stomach is key
Third, anyone starting out in a market this volatile can see why Peter Lynch was right that investing is less about a powerful brain than a strong stomach.
The biggest impediment to investor success, and the most difficult lesson we teach at Stock Advisor, is temperament. How well can you handle the emotions that come with investing, both the euphoric highs and the despondent lows? Can you put them aside to stay the course? Lynch wrote in One Up on Wall Street, "Some have fancied themselves 'long-term investors,' but only until the next big drop (or tiny gain), at which point they quickly become short-term investors and sell out for huge losses or the occasional minuscule profit. It's easy to panic in this volatile business."
Wharton School professor Jeremy Siegel had this to say about fluctuations in stock prices: "Fluctuations unnerve investors. Why? Because people can't stand them in the short run. Volatility scares enough people out of the market to generate superior returns for those who stay in."
You may recognize the previous two paragraphs from a piece I wrote nearly two years ago. I hope you don't mind me recycling them. In my opinion, they're always relevant -- and now is the time we really need to remember them.
The Foolish bottom line
If you're feeling sick when you look at your portfolio -- and especially if this is the first time you've experienced market turmoil -- you're not alone. We've been through this before, and even though it might not look likely, I firmly believe, based on the evidence, the market will come back and our investments will start making money again. It's up to you to decide how you'll prepare for that day when it comes.
I hope I've provided something for you to deal with the emotions you and I and everyone else are experiencing right now with our portfolios slashed by an uncaring market.
-- Jim Mueller, CFA (TMFTortoise)