Repeat after me….

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Logically if you are young investor you should root for bear markets.

There are a number of reasons for wealth accumulators to be happy when stock prices are spiraling downwards. These include:

  • When stock prices are cheap you can buy more company for the same amount of money.(This is the “stocks on sale” idea.)
  • In addition, all else being equal, cheap stocks will have larger dividends. (This is the “augmented cash flow” idea.)
  • And finally when stocks are cheap their expected future return is higher because stock prices tend to revert to their mean. (This is the “buy low sell high” theory.)

Logically these theories are all correct. And they are unassailable.

But if one thing is obvious, it’s that when it comes to investor behavior, logic has nothing to do with it.

Many people will claim to be happy when stock prices plummet, (but don’t you believe them for a second.)  They may claim to be savoring their buying opportunity, but downstairs where they really feel these things they’re registering hollow pain just like you and me. Count on it.

Because each downward zag of the stock market corresponds to some uncomfortably large number of your own precious dollars lost. And the downward price movement today only makes it more likely that tomorrow’s movement will plummet further downward.

Plus, most young investors also have parents who are older, non-earning investors. And presumably most investors love their parents?

In any case, in light of the actual way that I (and I suspect most humans) experience financial loss, and out of respect for the recent sucky-ness of this market which is acting quite “correction-ey” of late, I thought that I would share four wise Mantras to repeat to yourself during times of market stress.

Mantra 1: Without darkness there is no light.

zen-meditation

Ommmmmmm….

Translation: The only reason investors get paid extra money for investing in stocks is because stocks feel risky. And the only reason stocks feel risky is because they are prone to rapid devaluations and uncomfortable price movements. Simply put, without bearish periods of great financial loss there could never be the long bullish periods of great gain.  So the next time you get good news it will only be thanks to today’s bad news.  So why not take this opportunity to savor your future wealth?

Mantra 2: Investing is smart, stock flipping is not.

fortune-teller1

I have seen the future, and it is pork bellies…

Translation: Investing works well over long time horizons only because you are consistently buying little bits of corporations, most with lots of smart people working hard to innovate and make profits. Because of this , your wealth grows in proportion slow improvements in human productivity.  True wealth is built in fits and starts with compounding growth over long periods of time. The idea is to invest and keep on investing. Leave the tea leaf reading to the quacks.

Mantra 3: Mmmm…. Cheap hamburgers.

homer

Translation: Warren Buffett:

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

Mantra 4: The Giants win the pennant. The Giants win the pennant.

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Woooooooooooooooooohhhhhhhhhhhh!!!!!

Translation: for the first 37 years of my life I faithfully watched as the SF Giants sucked so badly that they were forever cellar dwellers.

Sure once in a while they would make it to the World Series, but in that case there would be sure to be some kind of a natural disaster (earthquake) or some kind of ridiculous idolatry (rally monkeys) that would force my beloved giants to lose focus and snatch defeat from the jaws of victory.

Then 2010 happened. And since then I’ve grown comfortable with the idea that it is our destiny to win the World Series every even numbered year from here on out.

(How else can you explain tonight’s Travis Ishikawa walkoff homerun?)

It seems to me this is an excellent metaphor for plugging away at investing over the course of a lifetime (And patiently enduring the bears along with the bulls) only to enjoy your wonderfully productive nest egg many years into the future.***

Besides I honestly believe this emerging pattern of every other year Giants dominance represents an excellent speculative investment strategy.

After all, what type of odds do you figure I could get for putting 100 bucks on the Giants to win the World Series…

….in 2016?

 

***If you are a Cubs fan, please disregard Mantra 4.

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3 Responses to “Repeat after me….”

  1. Mo October 16, 2014 at 11:41 pm #

    alright, so it IS ok to buy extra equities or indexes of equities when the market bears out? because if that’s the case then I’m rejoicing. but for some reason I thought by me buying when the market dips I’m actually timing the market which I thought is bad.
    sincerely,
    confused FP

    • Miles Dividend M.D. October 17, 2014 at 9:22 am #

      Mo,

      The purpose of this post was not to advocate for a specific trading strategy. it was meant more as a psychological crutch when you have money in the market and the market is going down.

      That being said, All things being equal it is (of course) better to buy stocks when they are cheap. but if you are buying extra stocks when the market is going down that means you had cash on the sideline when the market was going up, right?

      AZ

      • M Ashori MD October 17, 2014 at 9:36 am #

        It was a great post on the psyche of investing, for us general folk (at least myself) it’s important to get reassured by you guys so thanks for posting that.

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