One of my favorite phrases that perhaps I quote too often comes from Warren Buffet who says, the stock market is designed to transfer wealth from the impatient to the patient. That’s not an exact quote, but you get the idea. When the stock market is declining it’s because something’s convinced some people to sell shares and that can cause prices to fall. Others see the decline as an opportunity to buy the shares that are falling, which plays into one of my theories about investing – buy low, sell high.
My experience has been that investors are more afraid of losses than they are gratified by gains. When markets are ascending, that feels normal because isn’t that what the stock market is supposed to do? It’s when markets correct that drives people nuts, but think about it – if something corrects, isn’t that a good thing?
The very reason the stock market has produced the returns that’s benefited investors over time is because of risk. The stock market is a volatile thing and that volatility creates opportunity, which happens every time it declines.
The very next time you hear anyone describe an extended market downturn as a bad thing ask yourself, for whom?
There are safeguards for people who are at or near retirement that can mitigate market gyrations and produce permanent income, despite chaotic stock prices. The problem is that not everyone is familiar with these strategies, which could cause people in this particular age group to panic. When panic ensues, people can behave irrationally, such as selling stocks in a declining market. What that does is assure that the investor will lose money.
Young investors and anyone who is not nearing retirement should be as happy as can be when the stock market drops. They’re able to buy low, which gets to that fundamental adage about investing – buy low, sell high. These investors who are consistent and disciplined during declining markets have given themselves the opportunity to capture significant gains when markets ascend again.
Perhaps this all gives rise to the notion of market forecasting – I don’t pay attention to it. I have yet to meet anyone who knows precisely when the stock market has peaked, or when a decline is going to end. If you run across that person, please introduce that individual to me, but until that day arrives my beliefs will reside in idea that markets rise and fall, but tend to go up more frequently than not.
Rarely do I speak in absolutes, but to date, every person who has predicted the demise of the capital markets has been incorrect. That could change, but so far, it’s not the case.
One other point to consider while contemplating capital markets; equities and politics are not conjoined. It may seem that way at times, but stocks are businesses and businesses tend to find ways to make money, no matter what.
The panic will eventually subside. Some investors will win and some will lose. Watch for it.