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Peter Lynch, one of the world’s most successful investors and author of the popular book One Up On Wall Street, once said,
“Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.”
This insightful quote sheds light on a common mistake many investors make.
Table of Contents:
- Why do we constantly fear market corrections or crashes?
- Haven’t countless successful investors tried this strategy?
- The Unpredictability of Market Movements
- Recent Example: The Market’s Unexpected Rise
- The Illusion of Predictable Corrections
- The Missed Opportunity
- Common Reactions to Market Fluctuations
- The Trap of Anticipated Corrections
- The Pitfall of Selling High-Quality Portfolios
- The Lessons from the 2020 Market Crash
- The Swift Upward Journey
- Key Takeaway for Long-Term Investors
Why do we constantly fear market corrections or crashes?
Imagine you’re at a cocktail party chatting with fellow investors. Suddenly, someone mentions a news report claiming the market is “overbought” and a correction is imminent. A wave of anxiety ripples through the room.
This fear of seeing hard-earned investments decline is a natural human emotion, and it’s easy to get caught up in the sentiment.
This fear often leads them to anticipate market movements, turning them into ‘speculators’ rather than true investors.
Wouldn’t it be ideal to buy just before the market rises and sell just before it falls? While this strategy could theoretically make you rich quickly, in reality…?
Haven’t countless successful investors tried this strategy?
While this strategy may seem tempting, even the most legendary investors like Warren Buffet have acknowledged the difficulty of consistently timing the market.
Buffet famously said,
“The stock market is designed to transfer money from the Active to the Patient.”
Trying to time the market frequently is more likely to result in losses than gains.
The Unpredictability of Market Movements
The reason behind the difficulty of timing the market is simple – the market can fall much more than you anticipate, and it can also rise beyond your expectations. It often surprises (and shocks) investors on both sides.
Recent Example: The Market’s Unexpected Rise
Consider a recent example: the market touched 80,000 levels, and your portfolio surged by 10%. Your initial 10k investment quickly grew to 11k. Business channels are buzzing, claiming the market is ‘overbought’ and predicting a correction.
Wouldn’t it be great to sell your mutual funds now, lock in that 10% profit, and buy back when the market drops?
The Illusion of Predictable Corrections
You decide to sell, feeling satisfied when the market shows signs of falling with a 2-3% drop. You wait for it to fall a bit more, but then the market rebounds and rises even faster. It shoots up another 10%.
How successful is market timing?
As Peter Lynch said,
“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”
The Missed Opportunity
What are the dangers of trying to time the market?
What is the disadvantage of market timing?
Imagine if you hadn’t sold your investments. Your initial 10k investment would now be 12k. Instead, you have cash sitting idle in your savings account. Now, new questions start to arise: What if the market doesn’t fall? What if it continues to rise? Have you missed the opportunity?
This scenario illustrates the inherent challenge of trying to predict market movements and underscores why Peter Lynch’s advice remains so relevant.
Common Reactions to Market Fluctuations
In such circumstances, most people end up taking one of two paths. They either buy back during the next small correction, often at a higher price than they initially sold, or they find a way to spend the money on something else.
The Trap of Anticipated Corrections
Remember this: when a correction or crash is ‘anticipated,’ it usually doesn’t happen. Anticipated corrections tend to get delayed, and true crashes occur either during periods of extreme market optimism or due to unforeseen global events, such as the Covid-19 pandemic.
The Pitfall of Selling High-Quality Portfolios
I’ve known investors who built portfolios of high-quality companies, only to anticipate a market correction, sell their stocks, and then struggle to rebuild their portfolios to their former glory.
John Bogle, the founder of Vanguard, wisely said,
“Time is your friend; impulse is your enemy.”
This highlights the importance of staying invested and not letting fear dictate investment decisions.
The Lessons from the 2020 Market Crash
Even during the 2020 market crash, those who attempted to sell and buy back at lower prices often found themselves unable to re-enter the market. The fear at the bottom was overwhelming. You only recognize a bottom after it has passed, but during the decline, it always feels like there is more room to fall.
The Swift Upward Journey
When the market eventually began its upward journey, the rise was swift. Many investors missed the opportunity to buy because the previous day’s prices seemed much cheaper, and they kept waiting for those prices to return.
Key Takeaway for Long-Term Investors
If you are a long-term investor in a country with immense growth potential, like India, stick to your equity investments. If the market experiences a significant drop, consider buying more. Learn to manage your risks, maintain an emergency fund, and sell only when you genuinely need the money.
As Benjamin Graham, the father of value investing, said,
“The individual investor should act consistently as an investor and not as a speculator.”
By following these principles, you can avoid the pitfalls of trying to time the market and focus on building a strong, long-term investment portfolio.
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