Main Street Investor: Introduction

 

Navigating Market Turmoil: Stay Calm

If you're plugged into the world of investing at all, you're about to be inundated with bearish news. Calls for a recession, depression, and the end of the world as we know it will start to flood the media. You’ll hear statements like “Trillions of dollars lost in the market in one day.” People might start advising you to cash out your retirement account and stuff it in a mattress. The truth is, when markets take a downturn, the fearmongers emerge, offering their opinions on why stocks are a broken asset class forever.

Here’s the deal: I’ve been on the record saying that I am bearish on stocks in the short-to-medium term. The recently ignited trade war under President Trump will likely harm the stock market in the near future. If current policies continue along their current trajectory, they present a real risk to the structure of the American and global economic systems. However, there are really only two possible outcomes:

1. President Trump’s trade war persists, we isolate ourselves from global trade partners, and the American economy suffers long-term damage.
2. The trade war either works or resolves itself.

If the first scenario happens, there’s no strategy that the average person can devise to shield themselves from the fallout. It won’t matter that you’ve sustained long-term losses in stocks. If the second scenario occurs, we’ll return to all-time highs, and you’ll be kicking yourself for not buying stocks while they were cheap.

In times like these, it’s important for long-term investors to remember that these are really the only two outcomes on the table. Either the problem will be resolved, and you’ll wish you had bought the dip, or it won’t, and nothing matters anyway. If your time horizon isn’t long-term, that changes the discussion. But if you’re a long-term investor, you must keep a calm head and resist the urge to exit quality positions during these times.

Take the comment about investors “losing trillions of dollars in one day,” for example. This statement is, at best, misguided. Typically, when people make this claim, they’re referring to the S&P 500’s market cap dropping by trillions of dollars. But let’s think for a second: If the sellers of shares in an S&P 500 index have held those shares for any significant amount of time—say, over one year—then they likely sold them at a higher price than they bought them for. I'm not a mathematician, but that doesn’t equate to losing money.

Now, if you had the misfortune of buying shares of the same index at an all-time high this year, you only lose money if you’re selling those shares now. And frankly, if you buy shares of the S&P 500 and sell them at a lower price than you paid, you probably shouldn’t be managing your own investments. The real problem arises when people listen to doomsayers claiming the end is near and get spooked into making poor decisions. Don’t fall prey to that.

Let me share a story from my own portfolio to illustrate this point. The first market downturn I experienced was quite severe for my portfolio. After a stellar first two years, the market took a sharp dive in 2022, and my portfolio lost nearly 50%. If I had panicked and sold my positions to stop the bleeding, I would have "lost" money. Fortunately, I had the education and mental fortitude to hold my positions. Within two years, my portfolio recovered fully and reached new all-time highs. I didn’t lose money because my portfolio’s value temporarily dropped. In fact, if anything, I made money by adding to my best positions, which was eventually rewarded.

Good stock investors are a lot like real estate investors. They fall into one of two categories: buy-and-hold investors and flippers. If you're a buy-and-hold investor, you use market downturns to buy more shares at lower prices. If you're a flipper, the logic is the same: buy cheap and sell high. In either case, you don’t sell when prices are discounted. Unfortunately, average investors tend to get this exactly wrong. They often buy when euphoria and prices are high and sell when sentiment and prices are low. This strategy ensures you’ll never make money in the stock market.

I expect things to get worse before they get better. However, hopefully, after reading this, when you see doomsday predictions or hear about investors losing trillions every day, you’ll be more educated and better prepared to take advantage of the downturn instead. As the Oracle of Omaha, Warren Buffett, famously said, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”