I recently tweeted a thread on why there is never a “good” time to invest. How there will always be stuff happening that causes us to hesitate and second-guess ourselves while investing. Things like difficult markets, a tough economy, the usual government idiocy, bad press et cetera.
I want to steer the conversation in a slightly different direction and talk about how we can, and should, capitalize on the bad times for superior investment returns. How we need to actually be looking forward to these adverse events (from an investment point of view, not a social one of course).
This is counterintuitive, but bad times are a blessing for smart investors. They are a godsend. If we don’t utilize them and only wait to invest in the good times, well, that is a good way to lose money. Waiting until everybody is talking favourably about an investment is just asking to be relieved of your hard-earned money.
If you have even an embryonic interest in investing, you know about the Oracle of Omaha – Warren Buffett, and how he made and is still making his money. Buffett is famous (and rich) for looming in the background, waiting for dire but temporary crises, then swooping in for a juicy catch just as everybody is rushing outside for air.
It’s not just Buffett. Look up basically any wildly successful investor, past or present: Carl Icahn, Ben Graham, Charlie Munger and others. These are people who capitalize(d) on despondency and hopelessness to build empires. Buffett, for example, while he earned a ton of money from his investments during the global financial crisis of 2007/08 is credited in some quarters with having played a crucial role in saving the global financial system from a complete meltdown. By investing heavily in debt and equity securities of major banks, he breathed confidence into the American banking system at a time when talk of total capitulation was rampant. Back then, few would have entertained the thought of investing pennies in major banks leave alone the billions of dollars worth of capital injection desperately needed. Goldman Sachs and Bank of America particularly benefited from Buffett’s intervention at that critical juncture. Lehman Brothers reached out to him begging for salvation, but he turned them down, judging their state as being too cataclysmic to benefit from resuscitation.
Buffett makes his investments during the bad times. This is something we should emulate not just to survive, but to thrive in the markets. It’s about stocking umbrellas when the sun is shining so that we can sell them when it starts to rain.
Following this strategy is simple, but it’s not easy. It’s not easy because it goes against everything our minds have grown to interpret as normal behaviour, and it violates our very primal need to feel “safe”. We feel safe when we are doing things other people approve of. So we buy stocks when everybody thinks it’s a good idea. We buy crypto when it’s trending on social platforms. We buy land when all our friends and relations are doing it. Going against the grain is uncomfortable, but while going with the flow is comfortable, it is certainly unprofitable.
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If everybody is talking about how an asset class is a rip-off, or about how a certain stock is losing money, or about how land is a scam, chances are, you will subconsciously arrange your investments in such a way that you respect these widely held opinions. The average investor will not test or even perform rudimentary fact-checks to query whether these opinions are credible or just widespread hot air.
If an asset class is performing poorly and everybody wants to sell and there is evaporation on buyers, that’s probably the time to buy! I am emphasizing the word “probably” because an investment being in the masses’ bad books does not automatically make it a good buy. You still need to study the facts and make that determination objectively. The point is, learn to take popular opinion with a lump of salt. If popular opinion were a useful tool in investing, everybody would be a successful investor.
One thing to remember in the markets is that the majority is mostly wrong. That is why only a minority of people experience significant investing success. Look at your twitter feed, your Facebook, the news. Everywhere, people are giving opinions. Students, teachers, laymen, amateurs and talking heads are all opining from the comfort of their living rooms, sun up to sundown. Most of those opinions are wrong. Get used to it. If you listen to or depend on popular opinion to be the primary guide in your investment decision-making, you will mostly lose money. It’s only natural.
I like giving the example of 2016 when interest capping on loans by banks came into effect. It was a terrible time for banking stocks. It was worse than that actually. It was a bloodbath. I remember wondering if the stocks would ever recover. The selling was relentless. Banks lost 30% market cap in a matter of days. Talking heads were pontificating. Saying how it was the “end of an era” for banks. How investors had better sell their bank shares or suffer a long, painful drag into poverty.
Bank stocks have doubled in price from the troughs seen post-cap. By the way, this is the case independent of the recent repealing of the capping law.
Some people capitalized on the free fall of banking shares after the law came into effect to accumulate stocks. Even with the possible constriction on banking revenues, at some point, the stocks were surely oversold. That is where clever investors came in to relieve depressed sellers of their battered stocks for a song. The buyers are likely looking forward to the next crisis, and so should you.
Talking about investments, do you know how much you are worth? I have given you a guide on how to discover what you are worth and help you get organized in terms of your finances and investments. Check it out Personal Finance: How To Get Yourself Organized
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