Inexperienced investors can panic during periods of market volatility. But one small lesson on stock market perspective can turn disaster into opportunity…
There’s an old motivational story about two salesmen that I’m sure some of you have heard before.
The story goes that two shoe salesmen were sent to a foreign country to research the market opportunity. After a few days, one salesman contacts his boss and says, “This was a waste of time. No one here wears shoes.”
But the other salesman contacts his boss and says, “Send as much inventory as you can spare. No one here wears shoes.”
Blue Ocean Strategy
I’ve always liked that analogy. From an enterprising standpoint, it’s a pretty good breakdown of what’s now known as ‘Blue Ocean Strategy‘—seeking out new opportunities in untapped markets rather than trying to compete with the big players.
Ten years ago, PlayStation and Xbox were duking it out to see who could make the console with the best graphics and processing power. Nintendo recognized this and went in a completely different direction by making a family-friendly console that focused on more intuitive controls. The Nintendo Wii greatly outsold its rivals and is one of the great examples of ‘Blue Ocean Strategy’.
From an investing point of view, it’s also a great lesson in stock market perspective.
Stock Market Perspective
It would be ridiculous for me to tell people to look on the bright side of the market volatility. That’s not going to help anything. However, if you change your behavior and look at the bigger picture, you can actually force yourself to embrace downturns.
Usually, it’s when people find themselves with a surplus of cash that they start to explore the idea of investing. It makes sense. It’s nice to have a lump sum of cash, and it’s even nicer to do something with it that will make you wealthier.
But this is also the type of situation that can lead to the worst type of behavior that gets new investors in real trouble.
Typically, an inexperienced investor will see this lump sum as the money that’s going to secure their future. With that in mind, they rush it into the stock market as fast as possible. They don’t spend any time properly researching the companies they are interested in. They end up buying stocks, not thinking of the actual business behind them.
In addition to this, with all that money invested in businesses they don’t know or understand, the new investor checks his brokerage account every day and get anxious anytime he sees red.
According to behavioral psychologist Daniel Kahneman, we know that the pain of loss is almost three times as powerful as the pleasure of gain. This is referred to as loss aversion. So checking your brokerage account every day is going to cause nothing but agony to investors—even if your portfolio goes up two out of every three days (as is the average).
Then a market downturn happens and it feels as though the world is falling apart. All that money that was supposed to lead to the good life is disappearing before your eyes. To the investor, this is Black Monday—the day they’ve always feared.
But remember, investing is something you should grow into, not jump into.
With that in mind, starting small is usually the best approach.
The key is not committing a big lump sum to the markets. All that’s required is the determination to start investing a fraction of your monthly or yearly income over the long term. When it’s only a small percentage of your hard earned cash building gradually into a significant investment, your perspective when it comes to the stock market changes massively.
So let’s look at an example of how an investor with good stock market perspective will approach building their portfolio.
This investor might decide one day that they want to start planning for their future by getting their personal finances in order. They begin by spending a little less money every month. This is a life-changing decision that is going to positively impact them for decades if they stick to it. Already, they’ve made a more positive move than the person who simply threw a lot of money into the market.
Next, they start reading up on investing and the stock market. They buy books from the masters of the craft like Peter Lynch, Jack Bogle, and Joel Greenblatt. Each of these guys has a different approach, so there’s plenty of choice on what philosophy to follow.
They look into some of the companies that they already like and whose products they buy regularly. They read recent articles about these companies and research the CEO to see if they have a good track record. The ones that inspire confidence in them make it onto a watchlist, the ones that don’t get discarded.
Meanwhile, more and more money is building up in that savings account. They contact their bank and arrange for 10% of their paycheck to be transferred directly into a brokerage account every month.
Finally, they decide to start investing by buying a small number of shares in a big bedrock company like Apple or Disney. The next month, they might diversify by buying some shares in a different sector.
As the months pass, they continue to invest and build up a nice portfolio of stocks with that small fraction of their salary. They don’t check their account every day, they don’t feel anxiety every time the market goes down.
When the same downturn happens, they don’t panic. Of course, this isn’t the end of the world. Those investment books they read explained how these things happen all the time. In fact, they were right about to buy some more stocks with their monthly savings, and now they just got cheaper.
This isn’t Black Monday, it’s Black Friday. This is the long-term investor’s blue ocean.