Market Meltdown. Master Your Psychology Part 2 of 2

Summary

This video script offers valuable insights into the psychological aspects of investing. It emphasizes the importance of managing emotions during market fluctuations and the inevitability of downturns. The speaker, with over 30 years of experience, shares tips on staying calm, understanding the temporary nature of crashes, and the wisdom of investing in high-quality businesses. The script also highlights the pitfalls of trying to time the market and encourages long-term thinking, with the goal of wealth accumulation through consistent investment.

Takeaways

• 😌 Investing psychology is crucial, with 70% of successful investing attributed to managing emotions and temperament.
• 📉 Even experienced investors face downturns, and it's essential to understand that market fluctuations are temporary and part of the investment journey.
• 💡 Legendary investors like Peter Lynch experienced significant drawdowns, emphasizing that volatility is the price of potential market riches.
• 🚫 Avoid buying on margin or investing money needed for short-term expenses to prevent forced selling during market downturns.
• 🏆 Focus on investing in high-quality businesses with growing intrinsic value, which will likely recover from market dips.
• 💭 Recognize that market prices do not always reflect the true intrinsic value of a business, and mispricing can offer buying opportunities.
• 🔮 Adopt a long-term perspective, considering where your portfolio will be in 5 to 10 years, to mitigate short-term market fluctuations' impact on emotions.
• 🌈 Replace negative emotional language about market downturns with positive reframing to maintain a healthy investment mindset.
• 🚫 Resist the urge to look back with regret on missed selling opportunities, as consistent market timing is nearly impossible.
• 📊 Historical data shows that staying invested in the market over time yields better returns than attempting to time market entries and exits.
• 🛑 For traders, use stop-loss orders to exit positions when hit, and for investors, continue holding quality companies or consider deploying cash during downturns.

Q & A

What is the most important attribute for successful investing according to the speaker?

The most important attribute for successful investing, as mentioned by the speaker, is managing your emotions, temperaments, and psychology, which accounts for 70% of successful investing.

Why might a new investor find it difficult to handle a sudden drop in their portfolio's value?

A new investor might find it difficult to handle a sudden drop in their portfolio's value because they have not yet experienced market downturns and may not have the psychological resilience to manage their emotions during such events.

What historical market events does the speaker mention experiencing?

The speaker mentions experiencing the great financial crisis, the Doom crash, the trade war in 2018, the COVID-19 crash in 2020, and the bear market in 2022.

What is the speaker's perspective on market crashes after experiencing several throughout his career?

The speaker's perspective is that market crashes are temporary and not a big deal. If one does the right thing when a crash happens, they can end up even richer than before.

What is the first psychological tip given by the speaker for investors to stay calm during market downturns?

The first psychological tip is to understand that downturns are inevitable and that even the greatest investors experience them. The speaker uses the example of Peter Lynch and the performance of the Magellan Fund to illustrate this point.

Why is it important for investors not to sell during a market panic?

It is important for investors not to sell during a market panic because they only lose money if they sell at a low price set by the panic. If they hold onto high-quality businesses, the value will eventually rebound.

What is the second psychological tip provided by the speaker?

The second psychological tip is to remember that the market price does not always equate to the actual value of the business. The intrinsic value of a business is based on the free cash flow it can generate.

Why should investors avoid investing with borrowed money or money needed for short-term expenses?

Investors should avoid investing with borrowed money or money needed for short-term expenses because they may be forced to sell at a loss if they need the money back quickly, which could happen during market downturns.

What is the third psychological tip the speaker suggests for maintaining a long-term perspective on investments?

The third psychological tip is to always look at where the portfolio will be in 5 to 10 years and focus on the long-term growth. This perspective helps investors to have zero worries about short-term fluctuations.

How does the speaker suggest investors should react when the market price of their stocks drops significantly below their intrinsic value?

The speaker suggests that investors should ignore the market's mispricing and not panic sell. Instead, they should consider it an opportunity to buy more shares at a discount if they have the cash available.

What is the main reason the speaker advises against trying to time the market?

The main reason is that consistently timing the market is nearly impossible, and missing just a few of the best days in the market can significantly reduce long-term returns.

What action should investors take if they still have cash to invest during a market downturn?

Investors should start deploying their cash in tranches, buying a bit at a time as the price falls below the intrinsic value, without trying to pick the absolute bottom.

What should fully invested investors do during a market downturn according to the speaker?

Fully invested investors should do nothing and continue holding onto their investments, ignoring market fluctuations and focusing on the long-term growth of their portfolio.

Outlines

00:00

🧐 Embracing Market Volatility: A Psychological Approach

The first paragraph emphasizes the psychological challenges new investors face, particularly when experiencing significant market downturns that can quickly erase gains. It stresses the importance of emotional control, attributing 70% of successful investing to managing one's psychology. The speaker, with over 30 years of experience, shares insights from weathering financial crises and market crashes, asserting that these events are temporary and can be opportunities for growth if navigated correctly. Tips are offered to help investors remain calm, including understanding the inevitability of market fluctuations and avoiding investment on margin or with short-term needed funds.

05:02

💼 Investing in Quality: The Key to Enduring Market Turbulence

This paragraph focuses on the importance of investing in high-quality businesses with consistent growth, ensuring long-term returns even during market downturns. It distinguishes between market price and intrinsic value, using the example of Meta Platforms (Facebook) to illustrate how market prices can be detached from a company's true worth. The speaker advises ignoring short-term market fluctuations and not selling based on panic, but rather understanding the intrinsic value of the businesses one invests in, which will eventually align with market prices.

10:02

🤔 Long-Term Perspective: The Antidote to Short-Term Market Anxieties

The third paragraph discusses the significance of maintaining a long-term outlook to mitigate the emotional impact of short-term market fluctuations. It suggests that by projecting one's portfolio growth over 5 to 10 years, an investor can remain unfazed by temporary downturns. The speaker also addresses the negative psychological effects of certain expressions used by investors during market declines and recommends reframing one's mindset to avoid panic selling. The importance of not dwelling on past decisions and the futility of market timing is highlighted, with a chart illustrating the S&P 500's performance over a decade to emphasize the benefits of staying invested.

15:06

📊 Market Timing vs. Time in the Market: Strategies for Investors

The final paragraph addresses the futility of trying to time the market and the benefits of maintaining a presence in the market over time. It presents data showing the significant impact of missing the best-performing days on overall returns, reinforcing the message that consistent investment outperforms market timing. The speaker provides guidance for both traders and investors, recommending that traders follow stop-loss orders while investors should hold onto their investments in quality companies. For those with available cash, the speaker suggests a strategy of incremental investing, buying in tranches as the market dips, to avoid the pitfalls of trying to identify the market's absolute bottom.

Keywords

💡Investing

Investing refers to allocating resources, typically money, with the expectation of generating an income or profit. In the context of the video, investing is the primary activity discussed, with a focus on the psychological aspects of managing a portfolio through market fluctuations. The script mentions the challenges new investors face when their investments experience downturns, emphasizing the importance of a long-term perspective.

💡Portfolio

A portfolio represents a collection of financial assets such as stocks, bonds, and cash equivalents held by an investor. The video script discusses the impact of market volatility on an investor's portfolio, highlighting the importance of managing emotions during periods of decline and the inevitability of ups and downs in portfolio value.

💡Drawdowns

Drawdowns in investing denote the peak-to-trough decline in the value of a portfolio. The script emphasizes that even the greatest investors cannot avoid drawdowns, which are a natural part of market cycles. It suggests that understanding and accepting drawdowns as temporary is crucial for successful investing.

💡Psychology

Psychology in the context of investing pertains to the emotional and cognitive processes that influence financial decisions. The video script stresses that a significant part of successful investing is managing one's emotions and psychological state, especially during market downturns and periods of volatility.

💡Market Volatility

Market volatility refers to the rapid fluctuations in the price of stocks, bonds, or other financial markets. The script discusses the commonality of market volatility and advises investors to expect and prepare for it, rather than being taken by surprise or reacting emotionally.

💡Intrinsic Value

Intrinsic value is an estimate of the true value of a company based on fundamental analysis, considering factors like earnings, assets, and growth prospects. The script contrasts intrinsic value with market price, emphasizing that the latter can be influenced by short-term factors and may not always reflect the business's real worth.

💡Margin

Margin in investing involves borrowing money to purchase securities, with the expectation that the value of the securities will rise. The video script warns against buying on margin due to the risk of being forced to sell, or 'getting margin-called,' if the market moves against the investor's position.

💡Speculative Stocks

Speculative stocks are those of companies that may have high growth potential but also carry significant risk due to factors like unproven business models or volatile earnings. The script advises against investing in such stocks if one cannot withstand the potential for permanent loss of capital.

💡Dollar-Cost Averaging

Dollar-cost averaging is an investment strategy where an investor consistently buys a fixed dollar amount of a particular investment, regardless of its price. The script suggests using this strategy to gradually build a position in the market, which can mitigate the impact of market timing and reduce the risk of investing a large amount at a market peak.

💡Stop-Loss

A stop-loss is an order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a position. The script mentions stop-loss orders in the context of trading, as a tool to manage risk and exit a position when it reaches an unfavorable level.

💡Time in the Market

Time in the market is the concept of holding investments for the long term, rather than trying to time market movements. The video script illustrates the benefits of staying invested through market cycles, as attempting to time the market can lead to missing out on the best-performing days and underperforming the market averages.

Highlights

Psychological resilience is crucial for successful investing, with managing emotions and temperaments accounting for 70% of success.

Investors often face emotional challenges when their portfolio experiences significant drops, even temporarily losing gains.

Market crashes are temporary and can be opportunities for growth if handled correctly.

Legendary investors like Peter Lynch experienced significant drawdowns, emphasizing the inevitability of market volatility.

Understanding market patterns, such as regular drops, can help investors prepare emotionally for volatility.

Avoiding panic selling is key; losses only occur when selling at a market low.

Never invest on margin or with short-term needed funds to prevent forced selling.

Only invest money that is not needed for several months or years to withstand short-term market fluctuations.

Investing in high-quality, profitable companies can provide peace of mind during market downturns.

Market price does not always reflect a business's intrinsic value, so temporary mispricings can offer buying opportunities.

Understanding a business's value through free cash flow can provide confidence against market panic.

Long-term thinking, focusing on 5 to 10-year growth, can alleviate short-term emotional reactions to market drops.

The use of positive language and thought patterns can help maintain a healthy investment psychology.

Avoiding hindsight bias, such as regret over not selling at a high, prevents panic selling in future downturns.

The historical performance of the S&P 500 shows the importance of staying invested through various crises.

The cost of trying to time the market is illustrated by the significant returns missed by being out of the market during the best days.

For traders, having a stop-loss strategy is crucial, and for investors, holding great companies through market fluctuations is advised.

Dollar-cost averaging into the market can be a strategy for those with cash to invest, especially when prices are below intrinsic value.

The importance of sticking to an investment plan and ignoring short-term market noise for long-term success.

Transcripts

[Music]

now of course if you are new to

investing then

psychologically it may not be easy for

you especially if you just invested and

your portfolio suddenly overnight is

like down 10 15 20% because individual

stocks can sometimes drop even more than

the index itself or those of you who

have just invested for a couple of

months at first you saw your portfolio

up 10 15% and then it's all gone in in

like two days so psychologically a lot

of people find it difficult to handle

and that's why the most important

attribute to successful investing is

your psychology 70% of successful

investing is managing your emotions your

temperaments and your psychology so how

do you do that easier said than done so

you know being in the markets myself for

more than 30 years I've been through the

great financial crisis I've been through

the Doom crash I've been through the

trade war in 2018 I've been through the

covid 2020 crash 2022 bare market and

you know once you go through all these

crashes you realize that they are no big

deal they are all temporary and if you

do the right thing when it happens you

always end up even richer than ever

before and every time after a crash my

portfolio grows even more and that's

what gives me confidence to have zero

worries and zero fears going forward of

course if you're new to this and you

just know it in theory and never

actually experienced it before I know

it's not easy so here are a few uh tips

psychological tips that you can use to

uh stay calm and stay relaxed right so

the first tip I can give you is to

understand that no matter how great you

are as an investor whether you're Warren

Buffett or Peter Lynch or the greatest

investor in the world you can't avoid

draw Downs in your portfolio that along

the way your portfolio will not go up in

a straight line it will go through ups

and downs like I love to quote uh this

guy you know Peter Lynch for example who

was known as one of the legendary

greatest fund managers that ever lived

his career spent 13 years and then he

retired after that and in that 13 years

he managed the the Magellan fund and

it's you can see in purple that's the

performance of his mellan fund and

during that 13 years he grew his fund

64% versus the S&P 500 That Grew 223% so

he beat the S&P by about three times and

everyone wants there but again if you

take a look at his actual performance

you can see that he went through a lot

of draw Downs as well there were many

times where his

fund was down you know

56% you know 27 and a half% 42% 32% so

if you want to get rich in the markets

you have to pay a price and the price

you got to pay is the ability to

withstand this short-term volatility

because remember if you know that

markets will wave up and wave down and

you know that markets will go through

these drops three times a year at least

5% at least once a year more than 10%

once every three years at least 15% and

once every six years you're going to

have a bare Market if you know this to

be true you'll know that in the future

we will go through many many more

crashes so if you expect it and you

realize it's part of the game and

there's no way you can control when it's

going to happen there's no way you can

predict exactly when it's going to

happen then you no longer feel bad when

it happens you no no longer feel worried

you no longer feel upset because again

you know it it's part of that game and

if you think about it rationally and not

emotionally do do you actually lose

anything as an investor like I mean the

markets could drop 20 30 40 50% do you

actually lose anything no you don't you

don't lose right you only lose if

you sell at that crazy price that Mr

Market is panicking and if you sell

together with Mr Market who's panicking

you are as crazy as he is and so you

don't get hurt unless you're forced to

sell and you're only forc to sell if you

are buying on margin and you you get for

sold by the broker and that's why one of

my most important rules I tell my

students is never ever buy on borrowed

money number one number two never invest

with money that you need in the short

term if you need the money for something

for emergencies for expenses don't ever

invest it keep it in cash only invest

money that you know you don't need for

the next couple of months or couple of

years cuz if you don't need the money

then it doesn't matter where the price

goes in a short term so as long as

you're holding on to high quality

businesses that make more and more money

every year where the intrinsic value of

the business keeps going up then you

have zero worries zero worries the only

people who worry are those that are

holding speculative stocks that don't

actually make money because these are

the stocks that can drop and never come

back right but if the companies you own

make more money every year they will

always bounce back eventually in a

couple of weeks or couple of months or

the most one or two years that any drop

is always temporary yeah so only invest

in high quality companies the second

psychological tip to remember is this

that the market price that you see is

not the actual value of the stock of the

business that you own price does not

always equate to Value remember that so

the market price that you see does not

always reflect what the business is

really worth or we call the intrinsic

value remember what a business business

is worth is based on how much free cash

flow it can generate so I give you an

example look at meta so if you

understand how to Value the business

using free cash flow you will know that

meta platforms for example is worth

about $500 that's the intrinsic value

that's what it's really worth based on

what you can earn so in a in a short

term market price is influenced by

manipulation by Panic selling by force

selling by high frequency elos and it

can be totally different from what the

business is worth you can have total

mispricing so that's what happened for

example in 2022 now in 2022 meta's

intrinsic value was about $300 because

at that time he was making less cash

than it is today so when meta dropped I

remember when meta dropped to $70 and

people are panicking oh my God I was not

panicking I was holding meta and I said

what's the problem I know it's worth 300

right so even it drops to $1 I don't

care cuz I I ain't selling I know

it's worth $300 correct so remember that

it's kind of like imagine you buy an

apartment in a great location and you

know that your apartment is worth say a

million dollars yeah and next day a

crazy guy comes to you and say hey you

know this drunk guy he's on drugs and he

say I'm going to give you I'm going to

give You2 200,000 for the apartment now

will you say oh my God now it's worth

200 okay I'm going to sell it to you for

200

I lost 800 Grand no you you look at a

guy say you're nuts you're crazy go away

stupid idiot right I know it's worth a

million dollars and you know that that

drunk guy tomorrow he's going to uh you

know he's going to get sober and realize

yeah it's worth a million right so that

that crazy drunk guy is like Mr Market

if you know that the shares of meta is

worth 500 and the market is quoting

$70 you just ignore the market the

Market's nuts right if anything ignore

the market or take advantage of the

market buy the shares at 70 bucks from

this crazy drunk guy all right so when

you understand the businesses that you

own and you have confidence in your

valuation you don't care about what the

market price is right so that's a very

important thing to to understand so same

thing right now right now I know that

meta is worth 500 bucks so you know even

if the share price goes down to 300 200

who the hell care I don't care right I

ain't selling if anything I'll buy

I buy more from the market and I I'll

buy it at half price cuz eventually once

the market comes to its census it will

then price it properly back to 500 or

and get excited and go up to 600 in the

future all right so that's the second

thing the third thing is

remember one important uh psychological

thing I do is I always look at where my

portfolio is in 5 to 10 years I I always

think long term because if I know for

example that my portfolio is growing gr

at 15% a year then I know that in 10

years uh the value of the portfolio will

be four times more than it is today all

right but you guys know I'm getting more

than 15% a year I'm getting well over 20

sometimes 30 40% a year and if you're

getting 24% a year that means in 10

years your portfolio will be worth about

uh 10 times where it is today so think

about it so if if your portfolio is now

you know half a million dollar okay in

in 10 years you'll be you'll be $5

million okay so if you keep focusing on

5 million 5 million 5 million 5 million

right so like now one of my accounts is

about 4 million so I know very

confidently that in 10 years my account

one of my accounts will be worth 40

million and as you guys know I've got

two of those accounts that means in

total my two portfolios will be about 80

million in 10 years plus or minus a few

million right so if I keep thinking 80

million 80 million 80 80 million in 10

years then it doesn't bother me in the

short term it goes up and down it is

totally immaterial right so think long

term and you have zero worries in the

short term the other thing is remember

that what affects our

emotions your words your words affect

your thoughts your thoughts affect your

emotions and when I listen to the words

that some investors use I realize they

are screwing themselves up

psychologically like investors when they

see the market going down your portfolio

going to a draw down they say things

like oh my portfolio is bleeding oh

bleeding blood buff I'm losing so much

money right but like I said if you think

of it logically you're not losing

unless you're forced to sell unless you

are forced to liquidate right if not

then you own that apartment that crazy

man is offering you that crazy price

ignore that stupid man and you're not

losing anything so instead of thinking

of blood bath and and and bleeding think

of rainbows and C in your portfolio and

you feel differently right okay another

thing that I hear investors say that

screw themselves up psychologically is

they they look back say oh I should have

sold last week I should have sold last

month when it was a high you know and

they feel really bad about it right and

if you think about it it's really stupid

to think that way because number one no

one can predict where the market will

talk and where the market will drop

consistently no one can predict that and

the problem in is that once you

entertain this idea that oh I should

have sold last week last month and you

think that way what's going to happen in

the future in the future every time the

market drops a bit you're going to panic

and sell because you're going to think

oh it's it's the big crash again I

remember that movie right and and if you

keep selling at every little drop you'll

never stay invested long enough to get

your money to compound enough for you to

be wealthy and in the future every time

you hear some prediction by some Guru

that already recession is coming there's

this indicator indicates a crash oh my

God and and you just get out so fast

that you never stay in the market long

enough and that's why you know again

Peter Lynch one of my favorite charts

they I like to show is that you know

over time for example this over 10 year

period the S&P 500 gained 495 per. but

during this period there's always a

crisis there's always something to worry

about there's always

a reason to sell there's always a reason

to panic whether is it uh 663 th000 jobs

lost here or Chrysler GM went bankrupt

or the flash crash or S&P downgrades is

debt or you've got US Government

shutdown or Ebola virus contagion fears

or brexit or Charlottesville or trade

war or US Government shut down again S&P

enters a bare Market over there yield

curve inversion Iranian in there's

always something to worry about and your

ultimate success or failure in the

markets depends on your ability to

ignore the worries of the world long

enough to allow your Investments to

succeed you know and people always say

Adam if you knew that after wave up

there was going to be a wave down right

you sit there then why didn't you get

out why don't you sell when it drops you

get back in you know I've been doing

this for over 30 years and in the old

days I I used to try to time every

Market move oh Market waves up let's

sell and drop and I get back in again

and I used to do that right but I

don't do that anymore you know why

because when I look back I found that by

jumping out and jumping in and jumping

out and jumping in sometimes yeah

sometimes after I sell it goes down once

in a while it happens it's called luck

right and sometimes um after I sell it

keeps going up and I miss a lot of the

ride you know and I found that in a long

run by staying in the markets I would

have actually made a lot more money in

the last 30 years than me jumping in and

jumping out and so let me end off with

this graphic which I'm sure you've seen

before and I love to show to remind

people the cost of trying to time the

market everyone wants to think that they

can time the market everyone there's

this overwhelming temptation to want to

get out high and buy back low who

doesn't want to do that but

realistically in the long term it is

impossible to do it with any

consistency and you can see that if you

invested

$110,000 in the S&P 500 about 20 years

ago and you just held it through the ups

and downs and ups and downs and ups and

downs without timing it you just stay in

the market you would have ended up

548 if you invested in all the days of

the market right you're up from 10 grand

to 64 Grand okay but if you jumped out

of the mar market and you happen to miss

the best 10 days out of 20 years you

would have gotten only 197% return

versus 548 per. if you miss the best 20

days in the market in 20

years you would have only gotten a 78%

return if you met missed the best 30

days you only get a 17% return in 20

years if you just miss the best 40 days

which is about a month in 20 years and

you're not in the market in those 40

days you are actually starting you

already down

19% so if you try to get out of the

market and get back in the market that

means you're trying to get out and get

in and not miss the best 40 days in 20

years good luck with that because that

is really really difficult and that's

why the majority of people in the long

run they lose money in the markets or

they can't beat the S&P so the whole

idea is that time in the markets is more

important than trying to time the

markets so what should you do right now

if you are an investor or Trader well

first of all if you happen to be a

Trader then when you enter your stock

you should already have a stop- loss and

your stop- loss by now should have been

hit so once your stop loss is hit get

out stay out of the market until you see

the next bullish signal then you

re-enter the market with a new stop loss

and a new profit Target right but if you

are an investor then what's the right

thing to do if you're holding great

companies the right thing is to do

nothing just stay invested as long as

you're holding on to great companies so

in other words if you are someone who

has no more cash left to invest you're

fully invested then I suggest don't even

look at the markets ignore it ignore

this crazy Mr Market who's coming to you

and offering to buy your house at 50%

discount ask him to go to hell just

watch Netflix and ignore the markets

right and in a couple of weeks a couple

of months right I guarantee when you

look back you would forget that there

even was a correction because by then

Market should be back to New highs or

even higher highs in a couple of months

okay but if you still have cash to

invest and you don't yet have a full

allocation then now is the time to start

deploying your cash now again we can

never pick the absolute bottom so the

whole idea is to buy in tranches that's

what I do that once the price reaches

below the intrinsic value to certain

support levels I would then slowly buy a

bit buy a bit buy a bit until I've got a

full position so for example if you're

buying into the S&P 500 ETF you can see

I've identified four support

levels and right now the market has hit

the first support level which means if

your dollar cost averaging into the

market now may not be a bad time to

start buying a bit not all but a bit

because you never know the Market could

hit even lower in the short term because

remember once a year the market will go

down at least 10% and we are not there

yet so yeah going down to 10% is going

to be pretty normal even in this bull

market so which means buy a bit first if

it really goes a lot lower down to 10 12

15% then you can keep adding to your

positions all right so whether it

eventually bottoms here or bottoms here

you know we don't know but you'll

eventually bottom before again

rebounding and going back to new highs

all right so I hope this has been useful

uh to kind of like train our psychology

to go through draw downs and to

understand what's happening in the

markets right now so stick to your

investment plan and me the markets be

with you