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No doubt a lot of you, scarred by the GFC, by the 2020 pandemic-inspired drop in the market, or by the current sell-off, are constantly worried about a significant market correction. It’s no fun investing in “fear” and if that’s you then let me tell you about fear and in so doing rid yourself of the constant worry that the stock market is about to fall over and destroy your financial expectations.
Sidenote - Anyone who is wealthy, or inactive, or incapable of selling anything, you can stop reading here.
First you need to understand fear.
There is always, always, always something to fear when to comes to the stock market and fear is good because it’s the fear that creates opportunities. Rather than avoid fear, you should welcome it. It is in the grip of stock market fear and exuberance that the most money is made in the shortest timeframe.
You should also understand that when fear starts, we will perpetuate it. Fear is great for us, for the financial media, the brokers, the financial planners, the fund managers, for financial advisers, in fact it’s great for the whole finance industry. Some commentators make a living out of fear, like Nouriel Roubini or Marc Faber with his Doom and Gloom report. Why? Because fear triggers insecurity which drives investors to us. Fear is the sheep dog of financial services. It rounds up the sheep so we can shear them. Yes, the sheep, that’s you.
Fear is also a powerful magnet when it comes to attracting eyeballs and in a competition for clicks, when investors are at their most fearful, the clicks and eyeball numbers explode. Everyone wants advice and we will provide. Advice is the Trojan Horse of our commercial purpose. Fear achieves that for us. It is so much more effective than common cheerfulness.
Fear and Clickbait - Click bait in its natural form starts with the words “5 Things…”. To capitalise on that we chuck in some of the top click bait keywords, and then, if the glorious moment (as now) presents, we throw in some fear. “5 Things”, the keywords “Warren” and “Buffett” and a small sprinkling of fear, and you have the most commercial headline in finance. It goes like this.
“5 Reasons Warren Buffett thinks the stock market will Crash”.
Publish and wait.
The bottom line is that fear is just part of the great game that is the stock market (any market). It creates the lows, it creates the best opportunities to make money and for the finance industry, it is gold. Whether it is a broker looking for an order, a media person looking for attention, or a financial planner looking to convince a client that they need them, fear gets more traction than optimism, fear gets attention, fear gets clicks.
So when the stock market drops 5% in a day there are a few things you don’t do. You don’t join in! Fear makes you vulnerable as an investor. It distorts your normally objective state of mind. If you get fearful when the market loses its head you become part of the herd. Far better you recognise it for what it is, an emotional “moment” in other people's minds, and think about how you can exploit it. It will vary depending on the sort of investor you are the and sort of risk appetite you have.
When the market loses its head in fear:
So my thought process in the current sell-off has gone like this.
And that’s how you approach this moment. With the intention to exploit everyone else’s fear.
By the way. You can time the bottom. Don’t listen to those feeble commentators that say you can’t. They want it to be impossible so they don’t have to do it. For financial professionals, it’s a lot more effort handling active clients than it is handling docile 'buy and hold' sheep and the more clients they can convince that timing can't be done, the less activity they incur for the same amount of fees. Just saying.
You should welcome corrections and welcome other people’s fear. The most exploitable moments of the market are the fabulous exponential, irrational, exuberant bits at the top and the most fearful, despondent, capitulations at the bottom. They are the bits, the extremes, the opportunities, that make the market worthwhile. Those extremes, those moments of stupidity, absurdity, farce, ridiculousness and nonsense are brought on by other people’s irrational fear and irrational exuberance. You should expect them, look forward to them, and use them, not avoid them.
A good investor watches and exploits the herd. They don’t join the herd. Let that be you.
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Marcus Padley is the author of the daily stock market newsletter Marcus Today. Analysis as at 15 June 2022. This information has been provided by Marcus Today (AFSL is 473383), for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances.