Fool's Eye View

[ April 13, 2000 ]

Market Crash Survival Course

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- The world is falling apart for tech stocks at the moment: are we heading for a market crash? Well, I have to say, we have all been here before you know. People really should learn to look back at history and try to learn from it. Share prices have fallen quite sharply over the last few weeks: so what? Does it make any difference for us Fools? No, it does not!

Share price falls make good headlines for newspaper editors, but to Fools they should make little real difference. Why? We are all focused on the long term -- aren't we? Why would we care that the FTSE 100 has fallen 20% since it reached its peak in January? Do we really care that all we see when we check our Fool portfolio is one long column of red sad faces? (what do you mean you haven't set one up yet? Get over to My Portfolio and do it now!) Remember, we have been here before you know!

The Fool in the UK has been going for about three years. In that time we have seen a number of "market corrections". If you look through the archives of the Fool's Eye View and the Market News you will see that many times over the past three years we have written how the market has "crashed", and one theme that will always come through in our writing is that we don't really care! Have a look at this chart of the FTSE 100 over the last three years: what do you see? It goes up and down a lot, but the general trend is up. Have a look at all of the data that we have available (since 1989) and the trend becomes even clearer. You see, we Fools are concentrated on the long term performance of our portfolios. What we are interested in is how well they will perform over the next 5, or 10 or 20 years, we really don't worry when the market falls in the short term.

OK, that is probably not absolutely true -- none of us likes to see the profits that we have made over recent months wiped out in a short space of time, of course we cheer when our portfolio surges ahead, and of course we cry a little when it falls back -- but we are also able to be detached enough to recognise that it is the long term performance that matters. "Don't panic, Mr Mainwaring, DON'T PANIC!"

Way back in August 1998 David Berger (that famous TV personality who also happens to be the UK's Chief Fool) wrote about another market crash and said:

"What care we that 'more than £30 billion was wiped off the value of shares today?' We care, Fools, not one whit. Once more, the market does what the market does. As they say in Torremelinos (after six pints of Sangria): Que sera, sera!"

At that time the FTSE 100 had fallen from about 6100 to 5368.5. It went on to fall a further 600-odd points to 4700. Many commentators were predicting that the bull run had come to an end and we were on the point of heading into recession.

Where is the FTSE 100 today, just 20 months later? As I write it is 6295.7 -- that's up 34% since the low in September/October 1998. Why were all of the commentators worrying so much back in August 1998? In hindsight, you have to say we have no idea. The good thing is that we Fools can point you back to what we were saying at the time: you did not need hindsight to say "don't panic", all you needed was Foolsight! Remember, long-term, we all know that the market outperforms all other investment vehicles (see Step Five of the Ten Steps).

So what are the keys to surviving market downturns?

1. The most important thing is to switch off from the general market mania. Don't worry if the FTSE or the TechMark falls 5%, 10% or 20% (or even -- heaven forbid -- 40% or more). Just in the same way as you should not get too excited when the shares you own boomed up 20% or 40% in the past. Look at the companies whose shares you own in isolation. When you bought them, did you believe that you were buying into a quality business, with good management? Did you believe they would be able to grow their profits in the coming years? Has anything changed that would change your opinion of the business? If the business has not changed, then don't worry!
   
   
2. Remember number 1 only applied if you bought shares in good quaility companies. If you were simply trying to jump on a tech stock bandwagon, and did not consider the qualities of the companies whose shares you were buying, if you did not follow the Foolish ideals in selecting your shares, if you were simply looking to make a quick profit then a little panic might well be in order. Go and do the research that you should have done BEFORE you bought the shares, and then decide if they are companies that you want to hold for the long term.
   
   
3. Be a regular saver and investor. That way, a market downturn becomes nothing more than a buying opportunity.
   
   
4. Reflect that Anne Scheiber, the US lawyer who invested $5,000 in 1944 and died in the mid-1990s worth over $20 million, never sold a share and invested only in common, easily understandable companies. To her, we must presume, market fluctuations were an irrelevancy.
   
   
5. Remember Rosa Elizabeth Hargreaves who died in July 1999 at the ripe old age of 89. She amassed a fortune from investments started by her husband, John a grocer, 47 years before. He bought shares in Glaxo (LSE: GLXO), and held onto them with the intention of giving his family financial security later in life. After his death Rosa continued to live in her end of terrace house, with her son John, and her pet budgie Billie. When she died, John inherited £6.3 million (making him a very eligible bachelor at 51). John said that they money would make no difference to him, just as it made no difference to his mother. But what their long-term savings did was give them the financial security to say that it will make no difference!
   

So the market may crash: look out of the window. People are still milling about, cars are still moving, and trains are running, and there is food in the shops. Remember that we always say that you should not be investing any money that you cannot comfortably tie up for 5 years or more -- never invest with money that you may need in the short term. Remember, Fools: THINK LONG TERM!

Related Links
• Fool's Eye View discussion board
• The Market Crash Survival Guide by David Berger in August 1998
• The Ten Steps to Foolish Investing