Recently I wrote a blog post “Is Cash the King now” to express my view that investors should seize the opportunities due to the recent stock market crash.
Today I received a call from one of my friends. This guy is a DIY stock investor, he said he has lost thousands in the past few months and asked how my clients were doing. Probably he needed a “cold comfort” that other people have lost as much as him too.
He asked if my clients have sold all the investments and staying at the sideline. I told him rather than cashing out, it is probably a good time to top up the good stocks he always had wanted to buy. He said no way, he had cut his losses and he is ready to “short” the market.
What should be the right thing to do after the stock markets crash?
When markets crash, investors buy, traders sell, speculators cut losses.
I am telling you this story because I want to explain how most people invest or speculate their money. I have a chart below and these are the typical mentalities of DIY investors through the market cycles.
I can tell you from my years of experience providing investment advice, this chart is fairly accurate.
- When the market is up, people drag to participate and always hope for pullbacks, they always end up buying at the top.
- When the market crashes, people delay selling and always end up selling at the bottom
We all know the principle of investment is to buy low and sell high. But in reality, the majority of the investors buy high and sell low.
Be Greedy when others are Fearful, Easy Said than Done
Incidentally, I received an email from one of my stock brokers. He advised those who were “stuck” in the market last week to “sell on the technical rebound”. Then he quoted, “as Warren Buffet famously said, Be Greedy when others are Fearful, Be Fearful when Others are Greedy”. This is confusing to me. If most investors are fearful now, shouldn’t we “be greedy”?
The truth is that Warren Buffett became a billionaire because he walked his talk. But most “investors” I have seen are not able to ride on the market even with professional help. There were always few clients redeeming their investments at the worst possible time though I advise them not to. Selling when others are fearful is actually a much easier decision to make.
When I was in the office, I heard other advisers receiving calls from clients concerning their investments and their explanations seem to give little comfort to the clients. In the end, they also give in and tell clients to “slowly cut down the position” too.
Warren Buffett used to say:
“If you want to buy hamburgers tomorrow, should you wish for the price of burgers to fall or rise before you buy?”
Of course, you want the price to fall, isn’t it? But strangely, if you are going to buy an investment, why are you panic when the price of the investment falls?
The fear is definitely in the markets, your friends are fearful, your stock brokers are fearful, your advisers are fearful too. You need to have a tough mind to stay in the market.
But being tough in the stock market does not mean blindly buying stocks whenever there is a market crash. You have to really be confident that the hamburgers you buy today are more value-for-money than tomorrow, and that is the skill not everybody has.
How to invest in a stock market crash? Read these three simple strategies in this article.