There are 3 types of market participants in down markets.

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There are 3 types of market participants in down markets.

  1. There are those who sell out because they become nervous about the uncertain future.  They either move to cash or the stability of bonds.  Usually, they plan to move back into the market in the future as the future becomes more predictable.  After the market has already fallen, they sell out locking gains, erasing gains or establishing losses.  Unfortunately, even if the timing of the sale were right, being successful jumping back into the market most often is timed wrong.  Given their proclivity for safety, they wait until the future is much more predictable.  This means the result is often buying back in after the next upswing has already seen much of its gains.  The outcome is buy high and sell low.
  2.  There are those who hold on through the tumultuous market.  They don’t incur taxes from selling gains or write-offs from selling losses.  The market eventually recovers and they benefit from holding through the difficult period.  Overtime, growth benefits them.  The key to these investors is the price paid on their original purchase.  Was the price paid low relative to the value?
  3. Finally, there are those who see opportunities as the tide rolls out with the market shrinking.  These individuals savoir “shopping the thrift store” when the “blue light specials” lights up.  Their risk is that the market sinks even further.  While it can be painful buying a company as its market price drops, the process reduces their cost basis.  When the market turns up again, this strategy can provide big gains.  The market always turns up again.  The question is - does it turn up in a month, a year, five years or more.  No one knows this key piece of information.  Most value investors follow this path.  The most challenging aspect of this method is keeping your emotions in check.

For me, I’m a value guy.  I love sales.  Tell me, other than stocks, do you ever see people rush in to buy some item because the price goes up and run away because a store has a sale?  It sounds silly, but that is exactly what happens with investments.  Just about everything else people buy they want the lowest price and refuse to buy at high prices.  Clearly, there is something warped here!

Be smart, be well-read and be successful.

Copyright 2017 Mark T. McLaren