Warren Buffet lost US$4 Billion on 24 Aug 2015.
Do you think he is panicking? Do you think he is looking to sell his stocks?
If not, why do retail investors, who had much smaller losses, often worry that the end of the world is coming?
Didn’t retail investors knew that stock market crashes had happened and would happen? If they have went in with open eyes and preparation, they should expect market down turns and be able to deal with the bad times.
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Warren Buffett, among many other legendary investors, do not sell their stocks in fear. They hold and ride through market ups and downs, making decisions not because of stock price movements, but the underlying business fundamentals. They get rewarded in the long run by achieving an investment returns that are superior than what most investors can achieve.
So, do not scare yourself. Maybe thinking about Warren Buffett’s one day loss of US$4B would help soothe your fear over your relatively small loss.
Besides Buffett, the following billionaire investors also lost a handsome sum overnight (24 Aug 2015):
- Carl Ichan -US$1B
- Ray Dalio -US$520m
- Bill Ackman -US$450m
- George Soros -US$400m
But I Am Not A Billionaire!
You must be thinking that these are billionaires and they have too much money so they wouldn’t care! Retail investors earned money the hard way and could not afford to lose.
If you have this thinking, I am afraid that you are not going to like what I am about to write.
First, if you cannot afford to lose, you should not be investing that sum of money in the first place.
Second, these billionaires have the psychological capital that most retail investors do not have. They are able to amass billions because they can afford to lose many times more. Each investor has a psychological capital that he can invest without worrying. For some investors it might be $5,000, for others it might be $500. I do not know what is yours and you need to figure it out yourself.
If you want to make about $10,000, you must be able to handle a $150,000 loss. This ratio is taken from the stock market – the long term returns is about 8-9% while the maximum drop can be as much as negative 50%. Hence, you need to tolerate a risk that is 5 times the reward. However, psychologists found that humans value pain 3 times more for the same amount of reward. So we take 5 x 3 = 15, you need to prepare to take a loss 15 times your desired reward. If you cannot accept this, you will never achieve your target returns.
Investing above the psychological capital would make you uncomfortable and worried about your positions as market goes down. One way is to invest within your psychological capital but usually this amount is a small one and not meaningful to invest to make a sizeable return for your retirement.
The other way, which I prefer, is to increase your psychological capital.
The question is ‘how?’
The only way is to invest in the market first. Once you have stake in it, it is easier to experience the range of your emotions. Start to understand how you would react or think about as your investment value goes up and down.
Identify the stories you tell yourself, and determine if they are valid or merely fake stories to make yourself feel better.Remember scenes in movies where the angel and devil are speaking to you? The more you are willing and able to go closer to the truth, the more you can focus on the right perspectives in investing. We tell ourselves many bullshit stories everyday and you must learn to cut through them.
Hence, it requires effort in clearing the minds of an investor.
You can go on to read this from a fellow Singaporean investor, and how he managed to build an investment portfolio in the worst of times. This is an example of an investor with good psychological capital.
How is the CNAV Portfolio Doing Now?
The CNAV Portfolio is running for 2 years since 23 Aug 2013. Below is the performance.
|Annual Returns||CNAV Portfolio||STI ETF|
Even when market drops, fundamentally stable CNAV stocks are also not spared. But riding out the volatility is what we need to do as investors. It can dip one or two years, but look beyond that, because investment track record is more than weeks and months.
In fact, looking for opportunities to deploy excess cash is a very uncomfortable but rational way to approach investing.
So You Are A Trader
Traders would often pride themselves that they can make money not just in good times, but also in bad times. ‘Short the market!’, they said.
Why worry about market turns? Go with the flow and short it. It sounds good but it isn’t without risk.
While a track record of an investor has a lot more reliability in assessing his ability to generate investment returns in the future, a trader’s track record means nothing.
The reason lies upon the mantra of the trader, “you are only as good as your next trade.”
Traders are known to take leverage due to the nature of the products (futures, Forex and CFDs) and the short direction. Both of which can result in the trader blowing up his entire account if he fails to position size or cut loss correctly. It doesn’t matter if the trader has 10 years of winning track record. One mistake can wipe it all out, and I believe to err is human.
To me, this is the crux of the difference between an investor and a trader. And this difference is stark enough for me to switch camp to the former.
What Should You Do Now?
Psychological capital takes time to stretch. But in the mean time, what can you do?
If you are invested without taking any leverage – hold on as you cannot lose everything unless the stock market goes to zero. If that ever happens, we will all be dead anyway and it won’t matter anymore. If you want to sell some stocks to reduce your position, choose the fundamentally weak ones, not the ones you still have paper profits.
If you still have cash and thinking of averaging down – make sure you are able to handle the possibility that what you have bought just went down lower. It can continue to go lower as you add more stocks. If you are able to accept that then invest in it.
If you have been always sitting on cash and looking for a time to invest – an overall 20% drop from the index high may be a good stage to buy some stocks, but continue to hold cash. This is because the index can potentially crash to 50% from the high, and that is the point you should buy with the remaining cash.
If you are a trader and you have taken leverage – follow your trading and risk management rules. If the rules say it is time to get out, regardless of the degree of loss, get the hell out!
If you do not have capital now but a regular salary – start a monthly investment plan as soon as possible. Dollar cost averaging works best in a down trending market.