The S&P 500 fell by more than 20% in the first half of 2022, marking its worst start in decades.
In fact, wealth manager Ben Carlson said that the first six months of this year was within 3% of the worst-ever six-month stretch since 1926.
In times of extreme market turmoil, it’s easy to lose sight of what is important and what is not.
With that in mind, I would like to share 10 dos and don’ts for my fellow investors out there.
1. Do prioritise your mental well-being
Investing during a downturn is not just about what shares to buy and what price to buy them at.
You may land the best opportunities at a favourable price but if you lack the mental fortitude to hold those shares, you will be prone to selling too early.
Instead, keeping a level head should be your highest priority.
If you are experiencing sleepless nights over the day-to-day stock price movements, consider paring back your exposure to a level where you feel comfortable.
A calm mind is a key foundation for making better decisions.
2. Don’t forget the basics
Napoleon described military genius as the “the man who can do the average thing when everyone else around him is losing his mind.”
The same applies when investing during uncertain times.
Here’s the rub: remaining calm as share prices plunge is easier said than done.
The good news is basic steps, such as keeping cash for emergencies, can do wonders in keeping you on an even keel.
At the same time, if you only invest money that you do not need for the next five years, you can avoid the pressure of selling your stocks at the wrong time.
3. Don’t check on your shares too frequently …
Warren Buffett once said that games are won by players who focus on the playing field and not by those whose eyes are glued to the scoreboard.
With your money tied to the stock market, there is a tendency to keep checking share prices.
Yet, looking at stock prices alone (the scoreboard in Buffett’s analogy) will not leave you any smarter in deciding whether to buy, hold, or sell your shares.
4. … but do focus on the business
When a stock price falls, investors often jump to conclusions: the business must be in trouble.
For instance, in September 2012, shares of Apple (NASDAQ: AAPL) peaked at a little over US$25 before plunging by over 40% over the next three quarters.
Amid a falling stock price, the naysayers were quick to point out its flaws: heightened competition had led to slowing revenue growth and lower margins.
Yet, the pessimism overshadowed Apple’s strengths.
The iPhone ecosystem proved to be far more durable than pessimists suggest; since fiscal 2013, the Cupertino company’s earnings per share have grown by over 430%.
In turn, patient investors were rewarded with a near six-fold return from September 2012’s peak.
5. Do learn from history …
There are plenty of worries to go around today, ranging from the Russia-Ukraine war, inflation, and a potential recession.
Instead of worrying over things that you cannot control, consider spending time studying how businesses perform during a recession.
For instance, you may be surprised to learn that lululemon (NASDAQ: LULU), a consumer discretionary business, was able to deliver double-digit revenue growth during the Great Financial Crisis (GFC).
Now, it’s not to say that the athleisure company will outperform again in the next recession.
Yet, even as history may not repeat itself, it can rhyme.
Studying the factors that led to lululemon’s outperformance, such as its direct-to-consumer business model and strong balance sheet, can provide you with valuable clues about companies that do well during tough times.
6. … but don’t learn the wrong lessons
History offers great lessons.
But it pays to be discerning on what we learn.
Today, the prevailing wisdom is that rising interest rates have cratered the stock prices around the globe.
Under these circumstances, it would seem reasonable to offload your shares the next time there is a hint of a US Fed rate hike.
That would be a mistake, in my view.
For example, avoiding stocks between 2016 and 2019, a period of rising interest rates, would cause you to miss out on a 360% return from Amazon.com (NASDAQ: AMZN).
7. Don’t extrapolate extremes into the long term …
We have just lived through a period of extremes.
At the onset of the pandemic, there was a massive shift online. Today, we are experiencing the opposite as the world tries to find its footing.
Amid the chaos, many of us have adapted to living with COVID-19.
Yet, as investors, we should recognise that the huge shifts in the business landscape since 2020 are abnormal and unlikely to recur every year.
Projecting the past years’ extremes indefinitely into the future would be a mistake.
8. … but do think long term
When a business runs into trouble, it’s important to differentiate between temporary issues and structural problems.
For instance, the US print advertising market has been cut by more than half since 2012, and is projected to shrink further by 2024.
It’s no secret that digital ads have proven to be far superior in targeting customers; as such, the decline in print ads is unlikely to turn around.
In another example, shares of Starbucks (NASDAQ: SBUX) collapsed to under US$4 in late 2008, as the coffee brewer pulled back from its aggressive store expansion.
Backed by a strong balance sheet, the coffee chain re-jigged its business and was able to grow its profits by almost 1,400% over the next 13 years.
In response, Starbucks shares have grown by over 22-fold since its GFC low.
9. Do take your time to invest …
Share prices have come down but it does not mean that you should buy every cheap-looking stock that catches your eye.
To use Warren Buffett’s baseball analogy, you don’t have to swing at every pitch.
Buy because you want to own the shares for the long haul, not because share prices have become cheaper.
The Oracle of Omaha also said, “if you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
10. … but don’t try to be perfect
To go back to the Starbucks example, you could have mistimed your entry and bought shares at US$10 in January 2008.
Over the next 10 months, your performance would have suffered as shares plunged by over 60%.
However, over the long term, patient investors would still earn an eight-fold return over the ensuing 14 years: a demonstration that you don’t always have to time your entry price perfectly.
In the short term, price multiples can swing wildly, causing significant share price volatility.
Over the long term, however, the company’s revenue and profit growth will have an outsized impact on its share price.
Bottom line: Focus on long-term business growth, and you will do just fine.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Chin Hui Leong owns shares of Amazon, Apple, Starbucks, and lululemon.