The Internet is full of experts and wise guys. They have explanations and solutions for everything. However, it gets worse when forecasts come into play and people move away from the realm of safe known knowns. For my part, I don’t care much about forecasts that look too far into the future. That’s why I also think stock forecasts are nonsense. But I also realize that it is not that easy. Avoiding panic and staying positive at the same time can be challenging.
Panic and fears make people search for easy answers
Especially in volatile phases, the demand for orientation is high. People need anchors to get a grip on doubts and fears about the future. They ask themselves: Is the next stock crash imminent? Should I sell all my tech stocks? Do I need to invest in gold now? Accordingly, they search the Internet for answers and help.
A new sheriff in town
But is this search helpful? I don’t think so. Forecasts are impossible and it is completely uncertain how stocks will perform. Take the possible interest rate turnaround as an example. Will it cause stocks to crash? Maybe. But another option is that the real return (interest rate minus inflation) remains negative. Then we would have a whole new sheriff with a new narrative in town. In such a scenario, equities would remain virtually without alternative, since interest-bearing forms of investment do not yield a return despite higher interest rates.
Such a scenario could drive investors into the stock markets in droves. Multiples would then rise even further. Of course, the party could also end at some point. But no one can say when this will happen.
Short-term developments that are driven by emotions rarely have long-term effects
Furthermore, you should take into account that in almost all cases wealth comes only after a long time. That means, no matter what you decide now, it won’t make you rich in the short term anyway. It is highly doubtful whether your decision today, based on short-term uncertainty, will have a long-term impact on your wealth. A decision that brings short-term success can be detrimental in the long run. Just think about selling all your Apple shares just before a 20 percent correction. You’ll think that was a success. But if the stock triples over the next 10 years, it was a bad deal despite the short-term success.
I operate buy & hold and sell only rarely
I am therefore a fan of a long-term buy & hold approach. Stocks I buy, I buy to hold for many years as long as my investment thesis remains intact. Nevertheless, I sell shares from time to time (for example a few Apple shares from my holding). This way I create some liquidity. However, I keep the majority of my shares in a holding. I collect juicy dividends and I reinvest them in other stocks. Many fellow bloggers show how a snowball can become an avalanche.
However, sometimes, I sell some shares of an existing holding although I know I shouldn’t. For example, I recently sold some Apple shares, because I was bothered by the high valuation that continued to rise. This is part of my underlying strategy. When share price and operating growth decouple, I like to take some money off the table and put it into companies that are more cheaply valued. However, these moves are not short-term panic-driven situations, but part of my personal investment strategy. I call them cash flow trades and I do them from time to time.
Noise doesn’t help
Noise is terrible and creates more uncertainty than anything else. There are countless videos on YouTube about the stock markets and macroeconomic developments. From these, many investors draw conclusions about what will happen to stocks in the future. However, they confuse cause and effect.
I like this an old saying:
It is not the news that determines the stock markets, but the stock markets that determine the news.
You can spin the story any way you want and always find an explanation for certain stock market moves. If stocks go down, then they go down because of rising inflation, which makes a turnaround in interest rates likely. If stocks rise, it is because of inflation, which indicates that the economy is picking up. Everything is relative as the above example with the negative real return shows. Therefore, in the long run, it is hardly helpful to base one’s decision on such short-term narratives or numbers.
A proper investment strategy is crucial
Every investor should have a proper investment strategy. I think it is wrong to blindly buy hype stocks. We are in a market phase in which many private investors buy shares because they believe that the company will continue to grow. But that is only one side of the coin. They also have to look at whether the price for this growth is fair. A shockingly large number of investors are unaware of the intrinsic value principle. The intrinsic value of a share and the price of a share are not necessarily the same. To look at the relationship between the intrinsic value and the share’s price is the only way investors can rationally decide whether they’re paying too much for a stock or whether they’re getting a bargain. It’s so simple: the stock price reflects the value of the underlying business:
Shares represent rights and obligations that are forever tied to the company and its productivity. They are not just a piece of paper or a position in a portfolio. Shares are the company. And the company’s (future) well-being is the stock price’s fuel. That is why the price of a share always reflects the value of the company.
This means that we must always keep an eye on the company’s value when considering buying shares. Put another way: We must always relate the price of a share to the company’s value. If we don’t do this, we will loosen the close bond between share and company. By breaking this link, we are literally bird-free and can interpret anything into a share price.
For this reason, I use criteria that establish a link between the share and the company. The price-earnings ratio is a good indicator of how expensive the share actually is. I see how much money I have to pay and what profit I get for it as an owner. Why would I pay a fortune for a stock that doesn’t make a profit? Exactly. There must be good reasons why I invest anyway. I can only think of Palantir where I am invested despite the company’s losses. But here I also know the risk and that it is rather a gamble than a serious investment.
Avoiding panic and being rational
I don’t believe in scaremongering and worry. I am an optimist and try to surround myself only with people who also think positively. But there is a difference between seeing risks and not panicking and not seeing risks and therefore not panicking. The first (seeing risks, not panicking) is rational as it ensures healthy blood circulation and mental health. The second scenario (turning a blind eye to risks), on the other hand, I consider a time bomb.
I am risk-averse
I absolutely deal with risks, because I am afraid of risks. However, I do not sink into fear but have a simple remedy. I avoid risks. If I cannot avoid them, then I come to terms with them and look ahead optimistically.
Accordingly, I know the risks that come with investing in stocks. I can live with the fact that stocks can crash. My TeamViewer and Palantir stocks are massively down. That’s right. I’m not afraid of losses because I’ve already priced them into the stock purchase and I don’t hide them. What matters to me is the monthly cash flow and fortunately, that keeps going up despite all the volatility in the markets.
When it comes to the total crash, of course, it will hurt me too and I will doubt and be angry not to have waited. But in the end, I know I made a conscious decision to take the risk and I will endure it. In the long run, stocks have always gone up in a liberal capitalism-oriented world. So I will continue to put capital into companies as long as they have a working business model, are profitable (and pay a dividend).
Being rational means knowing risks
We just must not make the mistake of investing in bubbles. This risk is too great for me and that’s why I avoid investments in inflated hype stocks with bubble valuations. I may miss out on some returns, but I also avoid the risk.
Calling an investor who invests conservatively a chicken is ridiculous. In the end, those investors who stubbornly and steadily buy ETFs will perform better than the majority of stock-picker return heroes. The fact is, the performance of investors is lousy.
Acknowledging that you won’t outperform the market is also part of rational thinking for me. So anyone who tries to outperform the market should perhaps try to do so only with some play money and not with their total assets.
When it pops, I reduce my Internet consumption
When it crashes and I realize I’m getting nervous, I reduce my internet consumption (reduction is always the key). I am less on Twitter and don’t look at my online portfolio. Only now and then do I check the stock market prices and buy a few shares.
Guys, there are more important things than the short-term stock market ups and downs and above all more important things than chasing a dream of becoming rich quickly. The sun also shines when stocks crash five percent. And it also shines when a company goes bankrupt. So try to live a hedonistic life. Stocks are only one part of wealth management, and it is important that the other pillars of inner harmony are also in a healthy state. Quite essential components of asset management are also the workplace/one’s business and human capital.
Friendships are also important (as long as they don’t push people into the abyss of toxic relationships). If you are really nervous about volatility, take a good friend and go for a walk in the woods. Talk about everything and anything (but better exclude stock markets). In the evening, your worries about stock prices will seem so small. I promise because I’ve been there and I’ve done all that myself.