In Florida, storms and hurricanes are always on the horizon. The best time to prepare for the storm is BEFORE it hits. There is nothing worse than being stuck ill prepared. I have heard many horror stories of those who decided to "brave it out" and were scared S__t less.
The market is no different. To survive the inevitable downturn, you must be prepared. This means keeping a margin of safety and not getting "full in' at the top of a robust bull market.
I tell this to people all the time, but many times, they choose to ignore such advice. The inevitable downturn causes much financial pain that they were not fully prepared for. Furthermore, a bad market can wipe you out or cost you dearly, just like a hurricane.
A study of history shows that even well financed and solid companies fluctuate significantly over time. A DOW stock could drop 50, 60, 70 percent. What do you think happens with secondary stocks over time? They potentially fall even further and might go out of business!
By keeping a margin of safety, you are buying when few are willing to buy. Then, you are holding on and not buying at the top when everyone is excited. Just like your other purchases, such as groceries, you are buying when the sale is on. You don't want to pay full price.
Don't let the market price be your proxy for buying, but look at the long term financial status of the company. How did it do with various financial metrics over 10 years?
With a margin of safety, you will be prepared when the ill winds blow!
