Well, the timing was impeccable for my investing series. Literally the same weekend I finished it, the stock market plummeted due to the coronavirus scare, demonstrating the volatility of the stock market for those who venture to invest in it.
Is this a temporary set back or does this coronavirus correction indicate a longer bear market on the horizon?
Honestly, it doesn’t matter to me and shouldn’t to the young investor.
Investing like an Intelligent Investor
I have been reading The Intelligent Investor by Benjamin Graham recently- the number one best selling book on investing ever and with a forward from Warren Buffett himself. I’m going to include some of the snippets I have learned that are particularly applicable to this scenario.
You see, the stock market is an exchange where people trade shares in companies. The price of the company’s stock is based on 1) the actual valuation of the company PLUS 2) What speculators think the share value will do in the future.
Over the last few years, the speculators have been very confident. Share prices have been rising relentlessly. That’s a bull market. Everyone feels confident and everyone is making money. Our brains are wired to expect the same thing we have seen before.
“The longer the bull market lasts the more severely investors will be affected with amnesia; after five years or so, many people no longer believe that bear markets are possible.” ― Benjamin Graham, The Intelligent Investor
Some would argue that recently, stocks have been overvalued. For this reason, talks of a correction in the near future have been floating for quite some time. All we needed was a catalyst to shake investor confidence.
The Young Investor Has Nothing to Fear from a Bear Market
When stocks are overvalued, they are more expensive. Say we have been putting away $1000/month for retirement.
On Feb 19th, VTSAX was selling for $83.79 per share.
On Feb 29th, it sold for $73.13 per share.
So for the same $1000, we would have gotten about 12 shares on Feb 19th, and 14 shares on Feb 29th.
Does that sound like the end of the world?
No, it sure doesn’t.
It sounds like stocks are on sale.
“The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall. … you should welcome a bear market, since it puts stocks back on sale.” -Benjamin Graham, The Intelligent Investor
For young investors that are steadily putting money away for retirement and have a 20-30 year investment horizon, this correction will be nothing more than a blip where they got more for their money.
If the bear market continues for another couple of years, they will have a couple of years where they got a better deal on stocks. As long as the companies for which we are buying shares continue to exist, function, and prosper, so will we.
The stock market has survived the Great Depression, the World Wars, and countless other calamities. Despite these dips, it has posed a net positive earning for investors throughout history. Chances are good that it will continue to do so over the long term horizon.
How to Solidify a Loss in the Stock Market
Panicking. That’s how we solidify a loss.
Investing is very much an endurance sport. The way we solidify a loss is if we freak out and sell now. If we don’t sell, when the markets come back up, our money will come back as well.
I have seen many panicking posts on the internet recently about people wanting to readjust their portfolio to sell stocks and buy more bonds as the market dips.
Re-balancing in reaction to a market slump is THE way to make a temporary setback a permanent loss.
Sure, we can sell strategically to tax loss harvest by selling off depreciated shares and then buying them back at the depreciated value a month later so that we can write off the loss on taxes. But, we have to make the decision based on reason, not emotion.
What We Can Learn About Investing from a Dip
Speaking of rebalancing- This is a good time to look at how risky our portfolio is. If we find ourselves freaking out, maybe we should consider having more bonds in our portfolio when we do our yearly rebalance. Or we could diversify more into other investments like real estate. This is the time to observe our own reaction and learn about our own risk tolerance.
A Word on Speculation in the Stock Market
Some people are using this dip to speculate on certain stocks. They think buying the stock during the dip will bring them value in the end. If we have extra gambling money sitting around, sure we can give this a try- but we will have to get the timing right twice- once when we buy and the other when we sell. We must buy low and sell high.
Many think they can time the market, but very few people can. Even when they do, the transaction costs sometimes make the gain inconsequential.
I know I don’t know enough about individual stocks to make a good bet. So I won’t. I’ll just continue to buy index funds monthly as I always have and will hold them for many, many years to come.
“The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell. It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value…
The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down. He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.” Benjamin Graham, The Intelligent Investor
Investing is Not a Competitive Sport
Finally, remember that investing is not a competitive sport.
Investing is a one-on-one match against ourselves- a struggle to separate our higher cortical thinking from the constant barrage of impulses from our amygdala.
“But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” ― Benjamin Graham, The Intelligent Investor
If you haven’t read the Intelligent Investor, I highly recommend you check it out, especially if you find yourself panicking in these times of market turmoil.
Keep calm, wash your hands, for heavens sake stop stockpiling surgical masks (they don’t protect you from the coronavirus!) Edited to add July 8th, 2020: The recommendations have changed on masking since the writing of this article. While surgical masks do not fully protect us from getting the coronavirus, they are thought to limit the spread of it from us to others. Still, don’t hog all the resources!
…and stay frugal, y’all!
Till next week.
Disha
Standard Disclaimer: Not meant as individualized investing or medical advice. This post contains affiliate links.
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