I have some thoughts to share with you today to help you continue to be a better investor so you can live the life you’ve earned.
An unfortunate but true outcome during sharp stock market corrections is the transfer of ownership of a finite and fixed number of shares from those who were not prepared, and thus panic-sell out of fear, to those who were prepared and confidently buy shares at a significant discount.
You may want to pause and read that paragraph again.
Despite what the financial media and large brokerage firms convey, investing is not a reactive “market-oriented” activity, but a strategic and proactive “goal-oriented” process.
And, that goal-oriented process is based on market principles that we all have to keep at the forefront of our minds in order to avoid the common mistakes that occur during challenging market conditions:
- Markets work and they are working. Although we may not like the direction they take at times, the great news for all of us is that markets work even during crises, and information is incorporated into stock prices. We always have to remember that for every share of stock that is sold on a given day, there is a willing buyer on the other side making that purchase.
- Stock prices adjust to the point where a buyer believes they can earn a positive expected return from that point forward. Nobody buys a stock with the expectation of losing money.
- Think of it this way as an example. At $100 per share, a buyer may not be interested because he or she may not believe the expected return from $100 per share going forward justifies paying that price. However, if the price drops 20% to $80 per share, there is a greater likelihood of the buyer earning the expected return they want to justify the purchase price.
- Stock prices are forward looking, i.e. expectations about the future have already been incorporated into the price. In today’s day and age, what are the chances that you know something that millions of other market participants don’t know about a company?
- Volatility is brought on by uncertainty. If there was no uncertainty, there would be little or no return, i.e. treasury bills. Your ability to deal with short-term uncertainty, and thus volatility, is precisely what allows you to earn higher expected long-term returns.
With those principles firmly in our minds, stay tuned for the next edition where we will discuss one of the most common mistakes investors fall prey to during sharp market corrections.