When bear markets strike again, you'll need this key investing trait.
There are plenty of methods you can use to find shares that will earn you big profits. Without one key character trait, however, all the stock picks in the world won't make you a successful investor.
Bear Markets Change Everything
Bull markets are loads of fun for investors. Seeing your net worth rise month after month gives you positive reinforcement to do everything you ought to do: keep doing research on your shares, keep adding money to your savings, and stick with your best share ideas.
When the market's going up, you'll rarely be tempted to trade in and out of shares or time the market. Much of the time, that would simply reduce your returns, compared with buying and holding your shares.
During tough times, though, many investors throw all those good habits out the window. Suddenly, you stop adding money to your share dealing account because you don't want to throw good money after bad.
Bad news and ugly outlooks make you stop wanting to follow the shares you do own, and it's a lot harder to find promising companies that look like they'll be able to weather an economic storm.
Frequent trading also seems like a better idea when shares aren't doing well -- if only you'd sold a long-held share, you may think, you could have saved yourself from big losses.
What You Need To Succeed
Investing during good times is simple. If you find good shares, sticking with them through thick and thin is the easiest and best move. If the companies you invest in perform well, then you'll usually see immediate rewards as the share price rises with the overall market.
But when a bear market strikes, the key trait you need is discipline. You need the discipline to do your own analysis on the shares you pick.
You need discipline to build conviction in your share selections, so you'll be able to resist the reflexive impulse to dump your entire portfolio in the face of huge losses.
And you need discipline to stop yourself from trying to outguess the market by moving to a short-term trading strategy.
For instance, say that you had used the financial crisis of the summer of 2008 to buy shares of stocks that had fallen between July and the end of September. You could have gotten some attractive bargains, but as it turned out, you still would have seen huge paper losses by the time the market hit its March lows. Take a look at these examples:
| Stock | Change from
4 Jul 08 to
3 Oct 08 | Change from
3 Oct 08 to
9 Mar 09 | Change
since
3 Oct 08 |
|---|
| BHP Billiton (LSE: BLT) | (37%) | (14%) | 35% |
| Carphone Warehouse (LSE: CPW) | (16%) | (44%) | 9% |
| CSR (LSE: CSR) | (8%) | (33%) | 66% |
| Aggreko (LSE: AGK) | (25%) | (29%) | 37% |
| WPP Group (LSE: WPP) | (33%) | (19%) | 19% |
If you didn't have the conviction to stick with smart share selections despite the market meltdown, then it would've been tough to have the discipline not to sell them after such steep declines.
Yet if you had that discipline, you were rewarded with gains that more than made up for your previous losses after the recent market rally. In other words, although you had to work through a period of utterly irrational behaviour in the market, the fundamentals behind these shares eventually asserted themselves again, and share prices rose to reflect those fundamentals.
How To Be Disciplined
So how can you become a successful investor? Building discipline is a tough thing to do, but experience can be a great teacher.
If you successfully avoided panicking over the past year, then you've already passed one monumental test. And even if you did sell some of your holdings at the worst time, don't feel bad -- you'll know better next time, and the desire not to get tricked twice may help prevent you from repeating your mistake.
As easy as it is to click a button and buy shares, being a successful investor takes a lot more work. With patience and discipline, though, you'll be able to elevate your investing to the next level and find the success you've always dreamed about.
More on the economy and the markets:
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who doesn't have an interest in any of the companies mentioned in this article.
