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How to Think About a Stock Market Crash
Why Falling Stock Prices Should Make You Cheer
Dear investor,
I hope this message finds you well.
Every time the stock market dips by just 0.5%, we're bombarded with headlines of a"selloff”. When it drops by 1.5%, social media timelines begin to sound alarm bells, as if the world's economic collapse is imminent.
That's why I've decided to share two timeless pieces of wisdom I've recently come across on how to think rationally during selloffs - and how to act in these uncertain moments.
Save this article and return to it every time vour portfolio takes a hit. It'll help you stay focused on the long-term, whatever the market throws at you.
In the commentary on chapter 8 from “The Intelligent Investor” by Benjamin Graham Jason Zweig writes:
Stocks are crashing, so you turn on the television to catch the latest market news. But instead of CNBC or CNN, imagine that you can tune in to the Benjamin Graham Financial Network. ... The anchorman announces brightly:
“Stocks became more attractive yet again today, as the Dow dropped another 2.5% on heavy volume – the fourth day in a row that stocks have [become] cheaper. Tech investors fared even better, as leading companies like Microsoft lost nearly 5% on the day, making them even more affordable. That comes on top of the good news of the past year, in which stocks have already lost 50%, putting them at bargain levels not seen in years. And some prominent analysts are optimistic that prices may drop still further in the weeks and months to come.”
The news cuts over to market strategist Ignatz Anderson of the Wall Street firm Ketchum & Skinner, who says:
“My forecast is for stocks to lose another 15% by June. I’m cautiously optimistic that if everything goes well, stocks could lose another 25%, maybe more.”
“Let’s hope Ignatz Anderson is right,” the anchor says cheerfully. “Falling stock prices would be fabulous news for any investor with a very long [time] horizon.”
At first, this perspective may seem counterintuitive. Conventional wisdom - reinforced by sensational headlines - treats market downturns as financial catastrophes.
However, long-term investors should see the opportunity in declining prices. Rather than panic, they should stick to the logic of value investing, which suggests that lower stock prices provide better entry points for future gains.
But before celebrating lower stock prices, start by defining your investment goals for the years ahead.
Ask yourself one simple question:
Will you be buying more stocks in the coming years, or will you be selling?
Warren Buffett explains:
“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the 'hamburgers' they will soon be buying.
This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
- Warren Buffett -
Market declines should not be feared but welcomed by those who are still accumulating assets. As long as you are a net buyer of stocks, downturns present prime buying opportunities.
Remember, declining stock prices are not a problem, but declining fundamentals are.
So the next time you see a sea of red on your stock screen, ask yourself: Are you truly thinking like a long-term investor, or are you falling into the common trap of fearing what you should be celebrating?
Until the next issue. 🥂
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Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.
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