It’s a great time to take nervous nellie investors to the cleaners

It’s often said that fools rush in where angels fear to tread. So is it foolish to buy into the stock market right now?

Yesterday’s market suggests it’s a foolish time to buy anything. After yesterday, the S&P 500 is in official bear market territory. The DJIA briefly dropped more than a thousand points before ending down more than 800 points. All this followed a lousy week last week. Most of us in the market must either grin and bear it or try to cut our losses by selling.

By buying now, you are betting that markets will recover and that you can ride it out until this happens. You are also betting that whatever you are buying will be worth more then and there won’t be some fundamental shift in the world economy. But it definitely feels riskier investing now because there may be fundamental market forces at work that we haven’t seen before. We live in turbulent times that are likely to continue to get more turbulent. It may be that inflation is one of the few things you will be able to bet will keep on happening.

What’s basically going on is panic. Markets don’t deal well with uncertainty. That’s because markets on a daily basis reflect the consensus of those who feel the need to trade on a particular day. Unsurprisingly, this is often those who figure they will need the money in their investments in the short term, rather than the long term. When calm returns to the market, these same people move from panic mode to greed mode. Essentially, your portfolio is being held hostage by the nervous nellies out there. It’s a herd mentality that you can’t stop. But if you are nervy enough, you are likely to eventually come out ahead if you can hang in there and make these dynamics work to your profit.

When someone sells at a loss, someone else is buying. If no one buys what you have to sell, your asset becomes non-fungible. This is generally not a problem with stocks and bonds though: the seller just keeps reducing their asking price until someone bites. A market index becomes an overall fear index. The faster it goes lower, the greater the fear. The faster it rises, the greater the optimism.

A stock’s price reflects a current assessment of its value based principally on nervous nellie investors. It isn’t necessarily correlated with its actual value. A company’s actual value should be assessed using criteria like these:

  • Does this company have a unique niche in the market that makes it relatively immune from competition?
  • Is it well managed?
  • It is primed to rise quickly if certain criteria are met? If so, it might be worth the risk of an investment on the hopes of greater future gain.
  • Does the company have a history of producing profits both in good times and bad?
  • Does the company treat its employees well, recognizing that good employees make for good company?
  • Is the company well capitalized so it can endure during market downturns?
  • Is the company investing money wisely so it can be bring future products and services to market that will meet anticipated future needs?
  • Does the company show a history of being agile, so it can adapt flexibly to changing markets?
  • Does the company have assets that are now historically undervalued but are in demand and of quality?

If you see companies that meet these criteria, I’d argue that this is a great time to buy them up.

I’m no Warren Buffet, so I won’t give any particular stock tips. I don’t claim to be smart enough to pick these companies, mainly due to lack of interest. But I can sense that certain forms of asset look like great investments. REITs (Real Estate Investment Trusts), for example. Everyone needs a place to live. Internet services. Clean energy suppliers. Electric car manufacturers.

But I do know we made most of our money inadvertently by buying systematically in good times and bad. I can also report that so far no market downturn has lasted forever. We bought into a lot of funds when they were dirt cheap during the Great Recession, and were still a bargain in the years that followed. By regularly balancing our portfolio, we captured a lot of these appreciated assets and put them into cash reserves. So far my pension is mainly keeping us from spending that cash. But should we need it, there’s a healthy cash reserve that should see us through any longer term market declines.

The advantage of being a long term investor rather than a trader is that you use these market downturns to buy good assets at a discount. It’s the traders/nervous nellies whose profits you can expect to reap in time during these times.

I say take them to the cleaners. Someone’s going to, so if you have the money, it might as well be you.

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