Fool's Eye View
[ October 13, 2000 ]
Don't Panic! Don't Panic!
By Nigel Roberts (TMFNigel)
Chippenham, Wiltshire -- Stock markets around the world are falling, the oil price has again started to move upwards, and there are fears that war may start in the Middle East. Rising oil prices could trigger inflation in the industrialised world, which in turn could set off a chain of further interest rate rises around the world. Are we on the verge of a stock market crash?
Who knows, and who cares? Certainly not us Fools! Should you be panicking and selling all your stocks? Of course not! The fact is that in any year you'll witness ups and downs in the market, and if you are unlucky you may find yourself invested in the stock market through a crash.
It's time, not timing, that matters
Investment is all about time, not timing. There is no person in the world who knows when a market is at the bottom and no person in the world who knows when the market is at the top. The only thing I know is that if history repeats itself -- and there is nothing in the economic equations to indicate otherwise -- then one day, and it has rarely been more than five years away, the market will be an awful lot higher than it is today. Trying to time the market may prove to be an exercise that does more harm than good to your long-term investment performance.
The Fool in the UK has been going for over 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 been in in an atmosphere where all around us were crying "crash". 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, and we are pretty much back where we started. Have a look at all of the data that we have available (since 1988) and the trend becomes 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 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!"
So what are the keys to surviving market downturns?
- 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.
- Remember number 1 only applies if you bought shares in good 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.
- Be a regular saver and investor. That way, a market downturn becomes nothing more than a buying opportunity.
- 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.
- Some people can accept risk easier than others and don't get too worried when the markets start falling. If you are NOT one of those people, it might be a good idea to get used to the idea of a falling market, so that you are more prepared when there is a true market correction. When a market crash happens turn off the BBC, Sky News, Bloomberg or any other financial news programme. Constantly listening to short-term bad news can discourage a long-term perspective, and try not to check your portfolio every day, because it will only depress you!
- 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 would make no difference!
- Stock market falls are like the seasons of the year. They are a natural part of the investment landscape, they are normal and are probably very healthy. And will soon be followed by stock market rises.
Will the market 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!
Where Next?
