Lets go over what the typical investor was thinking over the last 18 months, from the peak to the current recovery phase.
Jan 2008 – Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!
March 2008 – I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more
Aug 2008 – The market is climbing again!! the bear market is over.
Nov 2008 – What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling
Feb 2008 – This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that
April 2008 – The market has risen a bit, but I am not worried. The market will drop once the election results are announced
May 2008 – The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait
Jun 2008 – let me wait for the market to drop
July 2008 – Let me wait for the market to drop
….and the mental circus continues
I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like
- The market is a casino and one has to be able to predict the market in advance to make money
- I should take more risk and should trade more frantically to make money
- One needs to be glued to the TV to make money
- All the losses are not my fault, though the gains were due to my brilliance
I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past
- There is only one person to blame for your losses – you
- There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
- Prepare in advance – I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
- Stop listening to markets forecast and silly predictions. They will cost you money in the long run
- Learn continuously. You may make money by luck in the stock market, but will not keep it.
- Stop looking backwards – I should have or would have done this, is not relevant. The question is – knowing what I know now, what do I plan to do?