“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett
The past few weeks have seen some turbulence in the stock markets that has ignited the flame of fear and panic that burns in the stomach of many investors. It’s easy to be an investor when the sun is shining but as soon as markets are falling and it seems as though every article you read or interview you watch is suggesting that the sky is falling it's not quite so easy.
Related article: Historical Stock market data
If you Google “falling markets” or “Markets are falling” (which I don’t recommend!) you’ll find yourself confronted by a number of headlines that seem to be designed to inspire fear and uncertainty. Naturally, each article is backed up by quotes from ‘experts' who reference plunging oil prices, a possible recession in Germany and the Ebola outbreak in West Africa as the catalyst for our next bear market. This trifecta of doom has certainly attracted a lot of media attention in recent days but whether this is a blip or the start of a longer downward turn in the markets remains to be seen.
Related article: Consequences of selling in a a bear market
I’m starting to think that the ability to keep your nerve when everyone around you seems to be losing theirs might be one of the keys to being a successful investor. However, when the media is full of speculation and the focus is on the storm clouds how do you know if what you’re hearing is fact and reason or the panicked voice of Chicken Little? Here are a few things to consider:
1. Where Did the Information Come From?
Just because something is featured in a media interview or a newspaper article doesn’t make it true. Just because the person making the statement is well dressed and/or well-educated and seems to know what they’re talking about doesn’t mean that what they’re saying is accurate. Just because a newspaper, magazine or media program is reputable and well-regarded doesn’t guarantee that what they’re printing is correct. We live in an era where our media outlets are hungry for ratings and lax when it comes to fact checking. When you consider that bad news attracts a lot more attention than good news, it’s logical to assume that taking what we’re fed by the media and accepting it as the absolute truth isn’t a smart move. Treat every piece of information with skepticism until you’ve done a little fact checking of your own.
2. Could it Be Wrong?
The one think we know for sure about the stock markets is that they’re unpredictable. If you look at stock market performance over the past 60 years you’ll see that markets move in cycles. No matter how good an investor is, there’s no way to accurately predict where the highs and lows of these cycles are.
Related article: Is it possible to predict the movement of the stock market?
The trouble is that the human brain hates uncertainty and loves patterns and so we try desperately to find trends and patterns where they often don’t exist. This is a big problem when it comes to investing because looking for trends often leads to unnecessary fear and panic. All we know for sure when it comes to the stock markets is that, historically speaking, there are more up years than down years and, on average, there are 3-8 up years between down years. Right now, we’re coming to the end of our third up year… whether 2015 will be a down year or not remains to be seen.
3. What Are Successful Investors Doing?
I am a firm believer that actions speak louder than words. When so many articles and news segments are preaching a tale of falling skies it can be tough not to get caught up in the negativity; my strategy is always to ignore the noise and instead, look at what the successful people I trust are doing.
Related article: Is investing logical or emotional?
There are four investors who I follow on a regular basis. Each of them has a slightly different approach to investing but each one of them has achieved a significant level of success over an extended period of time. They have found success in bear markets and bull markets and each one approaches investing in a logical way that makes sense to me. Right now, not one of them is acting as if the sky is falling; each one of them is continuing to invest and to talk about the opportunities that present themselves when markets are falling and the risks that exist for investors who act based on emotion vs. logic. It’s not a message that sells newspapers but it’s one that’s based in fact and logic which makes a lot of sense to me.
What do you think?