“You make money buying when the world seems risky and lose money buying when the world seems safe. When you’re really scared is the time to buy, not sell.”
There are times when the headlines are full of words that may strike fear in the hearts of investors, like “bear” and “recession.”
Your instinct might be to sell and avoid the potential for further loss, but some investing principles say that this impulse is the opposite of action you should be taking. Rather than running away from the market in a downturn, some investors may try to get in deeper – and at the least, commit to stay the course – even if it seems against the grain.
Smart billionaires like Warren Buffett and George Soros have built their wealth by running the opposite direction of the crowd. For instance, in the winter of 2016, when oil was anything but a hot commodity, investors like Buffett and Soros disclosed stakes in the Houston pipeline company Kinder Morgan. The share price had fallen about two-thirds in a one-year period, but once it recovered, those investors smart enough to put their confidence in the company’s strengths made a great return. One of the reasons why investing in Kinder Morgan was a safe bet that only appeared to be risky is that their core business is in natural gas, which remains a strong business segment. (Read more in the Los Angeles Times article “Smart Billionaires Buy When Everyone Else is Selling.”)
No investor can eliminate risk, but you can choose companies that have a history of making money. These companies demonstrate an ability to navigate the competitive landscape and have a foundation that allows them to weather a market downturn without going out of business.
Here’s another way to look at it, from our October 2015 “As We See It” quarterly reflection piece:
“At the daily level, the stock market can seem like a roller coaster even though a purely financial calculation reveals that the gains have historically more than made up for the losses. If people perceive loss at twice the extent as they perceive gain, it’s the sort of ride one might decide to avoid. This is why human nature can be an investor’s worst enemy. The best remedy is a change in mental attitude.
When an investor thinks about stocks, they should be mentally buying a collection of private businesses, not wiggles on a chart. A private business owner does not ask for an appraisal on a daily, weekly, or even monthly basis but instead focuses on profits and long-term growth potential. As Benjamin Graham said, ‘Investing is most intelligent when it is most businesslike.’”
If you’d like to talk more about the importance of resisting the temptation to follow the crowd in your investments, contact us at Lawson Kroeker. We look forward to helping you create the future you want, based on timeless and focused investing principles.