How To Survive Turbulent Markets And Come Out Ahead
In January 1848, James Marshall found gold on his land in Coloma, California.
News spread quickly of the gold discovery. Fortunes were reportedly being made in California. Throughout 1849, hundreds of thousands of people traveled over land and by sea to try their luck mining for gold. These folks — dubbed the “49ers” — were part of the largest mass migration in American history — more than 300,00 people came to California.
As you might remember from history class, these people came with dreams of striking it rich overnight. Unfortunately, for many that didn’t happen. Instead, many lost all the money they had borrowed and pulled from savings.
Those dreams suddenly became nightmares as reality set in. You needed luck, skill, perseverance, and a strong work ethic. It turned out that it wasn’t as easy as staking your claim and pulling gold from the ground.
In many ways, the stock market is very much like the California Gold Rush.
The average investor’s experience in the stock market quite similar. Every year, millions try their hand at trading stocks or options. The vast majority not only fizzle out, but most lose a sizable chunk of money before they throw in the towel.
Folks often see their hopes and dreams — unrealized gains — vanish overnight. Once those gains vanish, you begin to question everything. Those fight-or-flight instincts kick in and you begin making decisions emotionally. Your judgment becomes cloudy. Your thoughts dwell on those positions that once showed promise and are now going against you.
The losses keep piling up, and you begin to wish you would have booked that gain (at the stock’s absolute peak), or at least closed out for no gain. You’re not alone. Everybody goes through that same thought process. After all, nobody wants to lose their hard-earned money. But keep in mind that the pain of loss is stronger than the joy of a gain. (This is known as loss aversion, a phenomenon that’s been thoroughly studied).
Instead of getting caught up in the moment, watching your stocks every single day, take a step back. Take a walk, take a deep breath, and clear your mind. Then come back and reevaluate your positions.
Once you do that, here are five tips to keep in mind…
5 Steps to Managing Today’s Market Environment
1. This is probably the most important tip, yet the hardest for investors to do. I’m talking about separating your emotions from the market.If you find yourself scrambling to buy stocks when the market is rallying, or if you feel the need to bail on a big down day, then you know you’re investing with too much emotion. It’s easy to do… we don’t want to “miss the boat” on a market rally, yet at the same time we panic when things turn south.
Try to remain objective. Ask yourself, “What is the reason for doing this?” If the answer is based on fear — of loss or missing out — then you might not be making the right decision.
2. List the reasons why you bought the stock in the first place.
What fundamentals or catalysts attracted you to this company, and what were your expectations? Maybe it was a low stock price compared with earnings or book value. Or a high dividend yield. Or double-digit earnings or revenue growth. Whatever the case might be, write it down. That way, you can refer to these factors when the stock hits your exit criteria.
If you don’t have high conviction in your positions — even if they’ve fallen heavily from their highs — that tells me that you’ve allocated more cash to that stock than you’re comfortable with. You shouldn’t have devoted very much of your portfolio to that stock.
3. Always establish an exit strategy the day you make the purchase.
One of the toughest decisions any investor has to make is deciding when to sell a stock. Ask any seasoned investor and I’m sure they’ll tell you a story where they rationalized their way into holding a position until it became a major black-eye in the portfolio. By establishing an exit strategy the day you buy the stock, you can remain objective. It will help force you to make those difficult selling decisions. Plus, a well thought out plan gives you the confidence to do what you need to do when emotions are running high.
4. Set a profit target.
It’s important to address both scenarios that will happen when you purchase shares in a company. It’s either going up, or it’s going down. While planning for a loss is vital, equally as important is knowing when to book your profits. We’ve all ridden a stock up for a big gain, only to ride it all the way down again.
Of course, there’s no perfect formula for picking an upside target. It could be that the stock is trading at a high P/E ratio relative to its historic norm, or it could be as simple as getting to the point where you’ve realized a sizable profit.
This is where Tip #2 also comes in handy. Once you reach your target price, refer to this and see if your investment thesis still holds true. If it does, you may decide to book some profits now and hold a part of the position, or simply continue holding all of your shares.
5. Set your maximum loss threshold.
This is your ultimate pain point. The price at which you’ll sell no matter what. This is the fail-safe strategy that will keep you from riding the stock to a 90% loss.
Action To Take
These basic tenets should be something you keep near. Review them often. That way, when a turbulent day in the market strikes, you’ll be better prepared. These tips will provide the keys to taming investor anxiety and realizing safer long-term profits.
One final thing… keep this old Warren Buffett quote in mind during this market drawdown: “A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem.”
Covid-19 is a solvable problem that has wreaked havoc on stocks and the global economy… but it’s a problem that we will all get through, and one that is solvable.
P.S. For the past few days, I’ve been telling my readers about a little-known satellite company that just made a game-changing acquisition. And buried in the details of the deal was a stunning revelation that could be worth billions…