I have started to write an article about market crashes many times over the past several years. The last time I worked on this file was towards the end of last September (which in retrospect does not seem particularly volatile).
There are two main reasons why I have not written this type of article. The first is that I am very measured and deliberate and like to think things over. Each time, over the past several years, when I started an article like this, by the time I was ready to put my thoughts to paper, conditions had settled down and it seemed unnecessary. The second reason I’ve never penned an article like this is that I am reluctant to add to the excessive hype and hysteria. I am not a market watcher, but I happened to tune into Fox Business during the market opening a few days ago and I felt like I was watching a very exciting horse race. I only want to add to the excessive coverage and commentary if I have something meaningful to say. So I thought I’d share a couple of things I try to remember when markets are very volatile.
But first, why am I chiming in now? On the practical side, I wanted to address volatility this time around because I have gotten many questions regarding this issue. This dip is coinciding with the timing of some (ever-present) conspiracy theories about end of days, which is adding fuel to the fire. In addition, there are legitimate issues occurring around the world that are concerning (although, to be fair, there are always troubling issues happening around the world). When market conditions become very volatile, it is legitimately scary. Mark Twain defined courage in the following manner: “Courage is the resistance to fear, mastery of fear, not the absence of fear.” When markets go haywire, it takes courage to tune out the hysteria and continue to do what is prudent.
I have learned to “master” my fear of market volatility and remain relatively calm and steadfast by recalling all the academic research and data on financial markets that I have studied (all of which say markets are volatile). I review the financial science about investing a lot (some would say too much), so I thought I would instead touch upon three underlying fundamentals of markets and investing, which give me confidence when markets have downturns.
The first fundamental is that, at the most basic level, investing in equities is a way for me to become a part owner in businesses. Beginning investors frequently tell me they don’t understand the stock market or they are afraid of the stock market. After we talk more, I find that they are often overcomplicating it. When I invest my money in equities, I am quite simply becoming a part owner in businesses (in thousands of companies all over the world). As a part owner, I participate in their earnings, their profits and their appreciation. When markets go haywire, I am reassured that the businesses in which I am a part owner continue to operate just like businesses and companies where you work (even if not publicly traded) continue to function. This week, I went to Target, Marsh and Costco and utilized my Apple[1] computers and smartphone on AT&T’s network. All of these businesses continued to operate, and my part ownership in them was unchanged.
A second fundamental is that markets react to news. By definition, news means “new” information. This information was not known before and is unpredictable. As a result, markets are unpredictable. News does not occur in a linear fashion, neither do market movements.
In addition to those fundamentals, I also am mindful that market drops, while scary, do create some opportunities. On the investing side, drops in equity prices allow us to rebalance our holdings (selling high and buying low) and buy more shares at cheaper prices. On the business side, downturns can lead to improvements. When times are tough, companies do everything they can to innovate, improve operations and decrease expenses thereby leading to better times in the future.
When investors understand what they doing, they are less vulnerable to panic and have the courage to react in a sensible manner. The phase (originally attributed to Sufi poets) “this too shall pass” is helpful in times like these.[2] If you are prudently invested in a diversified fashion for a time horizon that is appropriate, you just need to sit tight.
If you would like some additional reading, I have found the following articles (and the articles linked in them) to be valuable. If you have concerns or want to talk more about current conditions, please let me know.
[1] Full disclosure, during the 08/09 recession, I occasionally popped into the Apple Store in Keystone when I was on that side of town for a “pick me up”. It was around the time of the iPhone 3 (still my favorite model) and the store was always buzzing and mobbed. I never bought anything, but just being there helped remind me that some businesses were doing just fine!
[2] Or a similar phrase, uttered by Mr. Bennet in Pride and Prejudice when recounting his shame and embarrassment after letting his daughter, Lydia, go off to Brighton with the officers…”it’ll pass; and no doubt more quickly than it should.”