You have to be able to keep your head on when most others are losing theirs.
Most people tend to look at things they buy with an eye on the value they get for the price they pay. When prices drop, people buy more of the things they need and want – except for in the stock market. Stocks may be the only thing in the world where the lower the prices, the less people want of them.
When in a state of high emotion, people forget that stocks are businesses with tangible values.
Author Peter Bevelin speaks to this trait of human nature: Why do most investors act emotionally rather than rationally? Because our brain is wired to use emotion before reason. Fear is our most basic emotion, our biological warning system for avoiding pain. Due to our tendency to fear, fast conclusions come naturally, we commonly act on impulse and form quick impressions and judgments. We work harder to avoid losing than we do to win.
A crucial factor in investing successfully, maybe the most crucial for most market participants, is to develop the appropriate reactions to price fluctuations – to volatility. Investors need to resist fear and the tendency to panic when prices are falling, and to resist greed and the tendency to become overly enthused when prices are rising.
Our favorite principles from two of history’s legendary financial educators:
- Ben Graham: In the short run the stock market is a voting machine [fear or greed], but in the long run it is a weighing machine [investment-specific economics].
- Phil Fisher: Invest in businesses that have disciplined plans for achieving dramatic long-range growth. Buy them when they’re out of favor; either because of general market conditions or misperceptions about their present worth and future prospects.
Our favorite principle at Red Pine:
Invest in the businesses with the best prospects for long-term growth, and the mutual funds and asset managers that invest in high-quality, growth-oriented businesses.
Why? History speaks loud and clear to the fact that stock performance = business performance in the long run.
Let reasons, not emotions, be your investing guide.