A few years ago, I had the opportunity to watch a video of the World Chess Championship match.
Defending champion Vishwanathan Anand played against Boris Gelfand, the Israeli chess champion.
One thing that caught my attention was their patience with each move. Neither of them rushed to make a move upon their turn.
More than talent, I feel, the amount of patience they apply is the key to success here.
Can the same theory be applied in stock market investments as well?
How important is patience in stock market investing?
Is it possible to “get rich quick” with stock market investing?
Read on to discover your answers about stock market investing that will make you wealthy.
Table of Contents
1. To Sell Or Not To Sell?
2. Value of Undervalue Purchase
3. Bear Market? Be Greedy!
4. Be Stoic With Your Stock
5. Regulate Emotional Decisions
6. Word To Remember
To Sell Or Not To Sell?
I am selling the stocks when the market goes down and save myself from a heavy the loss. What is wrong with this?
I’d say everything!
You sell a particular stock just because the market crashed . Later you feel sorry for seeing the same stock going up after a market recovery.
You tell yourself: “Ok, I sold to save myself from losing big money, what is wrong with it?” and move on with your routine.
Lack of patience has cost you the profit, and part of your initial investment if not all.
The same happens when you rush to buy stocks only because the trend is such. Without understanding the fundamentals of that particular stock.
Isn’t this a bad decision making?
Look at the anvil of the blacksmith, how it is hammered and beaten; yet it moves not from its place. Investors need to learn patience and endurance from it. You can have 100% benefits in the stock market only if you wait with patience. Remember the words from Jessy Livermore here. ‘The big money is not in the buying and selling…. but in the waiting’.
Says Jesse Livermore, American pioneer stock trader.
Value of Undervalue Purchase
Howard Marks
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- It is a known fact that the stock market is a highly volatile place. One can easily argue, emotions decide the majority of the trade than anything else.
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- Is this just another useless factoid about the stock market?
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- Or could it mean something that gives you an edge over the average Joe investor?
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- It sure does mean a lot.
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- Driven by the emotional decisions of investors, especially fear, the stock market tends to leave certain stocks undervalued. Undervalued stocks are the stocks or shares of a company that are traded at an unfairly low price.
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- Undervaluing of a stock is not restricted to the bear phase alone. If you go through the share prices of listed companies, you will find a good number of undervalued stocks. It may vary only on the magnitude of how much a share is undervalued compared to a bear market.
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- The oracle of Omaha, legendary Warren Buffet is a renowned value investor. He says,
Value is what you get.”
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- Make value investing your core investment philosophy. Even though emotions influence the stock market in the short-term, a quality stock will stand the test of time and market cycles.
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- This approach is perfectly in line with the “Buy low. Sell high” rule of investment.
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- Purchase undervalued high-quality stocks and hold them for the long-term. It will set you apart and above the mainstream noise of the stock market.
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- And with enough time, the market will appreciate these stocks and reward those who invested in value.
Bear Market? Be Greedy!
Do you know the best way to survive a bear encounter?
It is not to hide. It is not to run away.
It is to do nothing but stand your ground, make yourself appear bigger.
Sounds ridiculous, doesn’t it? But it works.
The same is true and very fitting when “bear” hits the stock market.
Be Greedy When Others Are Fearful”
Warren Buffet
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- Typically, when the stock market crashes, a majority of the investors sell their shares out of fear.
They fear that their shares will lose value and they will be left with nothing. Fear feeds on fear, they become just another snowflake among the avalanche.
But the real investors—the stronger ones—assess the reality of the situation and see how great of an opportunity it is.
i) How Is A Loss An Opportunity?
It may sound odd, even ridiculous to some.
But the fact is, it is indeed a great opportunity.
Remember the importance of value investing discussed earlier?
It is the same take here but on a gigantic scale of rewards.
When the stock market crashes, even the high-quality company shares are undervalued. The added advantage is that you do not even have to research as much to discover quality stocks since the whole of the market will be undervalued.
All you have to do is get greedy of the situation. Purchase those high-quality shares as much as you can. Consider this as a booster for your investment portfolio.
After all, the stock market crash is often also called stock market correction. And the market is already at the bottom, there is no other way but to go up.
ii) Recovery is Real
As an investor—amateur or experienced—you have to keep in mind that unless it is an Armageddon, recovery is certain.
Moreover, whatever may be the cause of the stock market crash, the time taken to go from bottom to recovery is always shorter than what it was during the normal run.
For example: In the recent Covid19 stock market crash, the SENSEX crashes from a peak of 42000 points to 25000 in a matter of days.
But it recovered and is moving forward again in a matter of 8 months.
If we look at the charts, SENSEX was at the 25000 level back in 2016. It took 4 solid years for SENSEX to gain those points in the first place. But while on recovery, it is just 8 months.
Every investor who stayed and invested more in this crash have already gained more in their portfolio than those who sold their stock.
It reminded me of one of the famous Latin proverbs: “Fortis Fortuna Adiuvat”
It means…
-Terentius Afer
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- Only thing to remember whenever you feel the panic of loss creeping into your thoughts.
See every stock market correction as your opportunity to invest more.
Fortune will favour you, too!
Be Stoic with Your Stock
“Invest in the stock market, do nothing but wait. You’ll get the highest returns in 10-15 years.”
Is this a gimmick or a joke?
Not at all!
There is a misconception about comparing the stock market with a poker game.
Those who want to make quick money, start investing in the stock market unaware of the facts. Many go away from stocks thinking that they would suddenly lose everything they invest.
The reality of investing in stocks is different.
Do you know the probability of losing your money in long-term stock investments?
It is zero!
Also, you get a return of about 13-17% CAGR.
For example: Let’s say you invest ₹10,000 in Sensex or mutual funds now in 2020.
By the end of 2030, the money you reap will be approximately ₹1,80,000 which is a 15% increase per year.
Actively selling or buying stocks in the short term will make you a very poor investor. Literally!
As the investment guru Warren Buffet says,
Regulate Emotional Decisions:
“It is very tough for me to overcome the impulse to sell or buy a stock when the market is fluctuating.”
“How can I control this emotional impulse?”
Is this your worry here?
First of all, understanding how the market is designed will help in controlling the urge of making quick decisions.
The stock market is so volatile and you can learn the trend only by looking at its history. The graphs, up and down arrows with some percentage given daily or weekly basis will not help in decision making.
Look at how the market worked in the past 10-15 years. There were fluctuations due to various reasons like natural disasters, terrorist attacks, global economic fall-down, political changes, and recession. You must study how the market recovered each time it crashed.
Whenever you feel the impulse to take any short term stock investment decision, ask yourself these questions:
Is there any change that happened in the fundamentals of the stocks you hold?
Is the stock price fluctuation connected to the performance of the company alone or the overall market condition?
What is the history of this company’s performance?
How are other companies in the same industry performing?
Why did I choose to invest in this particular stock initially? And has the reason changed now?
Have I done enough research on this particular stock while investing?
Have you considered the tax consequences?
Are you selling because of the underperformance in the stock or market or industry?
Is the stock undervalued or overvalued at its current price?
Do you have the better use for the money after you sell?
Is your decision emotionally driven, emotional, or reactive?
Answering these questions will help regulate your impulsive decisions.
It also helps you with situational awareness and wait even longer for reaping the highest growth on your investments.
Peter Lynch beautifully advises on this point,
Word to Remember:
The ideal way to get the best out of your stock market investments is to invest for the long-term.
To think in terms of long term investing, you have to decide what are your short-term and long term financial goals.
It will lead you to the bigger, better world called Financial Planning.
If you are serious about your financial goals, creating a financial plan for yourself is your only way to realize them. Your comprehensive Financial Plan will be the Alpha and Omega for your financial goals.
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Your article was a breath of fresh air in a sea of financial advice. The way you presented the rules was not only informative but also incredibly relatable. You managed to distill complex financial concepts into practical and easily understandable guidelines. Your writing style is engaging and approachable, making it a joy to read and absorb the valuable insights you shared.