The markets have had a brilliant run in the past 5 years since the financial crisis. Thanks to Central Bank money printing to keep interest rates artificially low, equities have recovered their losses and then some.
Hopefully that has transferred to your personal portfolios. What? You say you haven’t been investing in stocks? You say you’ve been too scared and freaked out by the losses you took?
A lot of investors have been in the same boat and have had a front row seat to the re-ascendency of the stock market. I’m going to guess that you have had incredibly mixed feelings. First, you feel great because your portfolio isn’t going down anymore and feel somewhat secure in holding bonds that pay next to nothing in interest or keeping your savings under the mattress. So you’re sleeping well at night and that’s always a good thing. On the other hand you’re seeing this runaway snowball called stocks getting bigger and bigger and you’re not getting a piece of the action. How do you feel about that? If you’re human, you feel like an outsider, that you are not part of the cool crowd.
And what is our tendency as humans? We jump in at any cost, so we can feel more accepted and ride the wave up. We can then hang our heads high at our friends barbeque and brag of how we’ve made a killing in the stock market.
Unfortunately, we display these feelings of equities-envy at the worst possible times. Our emotions get the better of us. We get back in to buying stocksâ€¦at any price with regard to understanding the fundamentals of the business and the context of the world it operates in.
It’s OK. You’re just being human. We’re wired to yearning for acceptance.
There are two ways to deal with this. You can succumb to your emotions and do a cannonball into the stock market or you can develop a strategy to calmly deal with these panic buying emotions. It’s important to consider to the following
Step 1: Admit and Ignore
You have to just bite the bullet and come to grips with the reality that you have just missed the train. The money has been made. You need to get over it, take a deep breath and move on. It's better to catch the next train. Your focus is to position yourself to get on the next train because there will be another train. You will need to build up a resolve and accept the fact that you will be in conversations with your friends and colleagues where they will brag about the killing they made in stocks. Either change the topic or leave.
Step 2: Refocus on First Principles of Investing
The one way to ensure you get back onto the next bull market is to review and reacquaint your understanding about the key principles in wealth creation in the stock market. Reconfirm your understanding of how companies create wealth in our free-market, capitalist society despite the fact that these fundamentals are not driving stock prices up but central planning of money printing.
Step 3: Continue to Do Your Due Diligence
When we succumb to panic buying, we resort to buying whatever we can get our hands on without doing the proper analysis and due diligence. We get lazy. We cut corners in our analysis. We are more susceptible to tips from our friends who because of their success know how to pick successful stocks in perpetuity. Emotions drive our decision making at this point. We need to build a discipline to push ourselves to roll-up our sleeves, crunch our numbers and make honest assessments. The beauty of being an investment coach is if we are are on our game, we will make very sure that you don’t become lazy and give you that encouragement, motivation, and independent perspective to ensure you are doing the necessary work to make that proper investment decision.
It is important that you stay very true to these elements because they will keep you focussed and disciplined in how you frame and make your investment decisions. You do not want to be holding the bag of overpriced stocks when the music finally stops. The music will stop. It always does and stock prices will come back to earth. If you have done your due diligence, you will be able to take a more offensive position to pick up, cheap, well-run companies as the paradigm will then change from panic buying to panic selling.