from around May 2020, when equities As the Chinese recover from the crash caused by the virus, equity prices have been on a roller coaster, with different sectors and scales of companies spending their days in the sun at different times. Investors are looking for anything that gives them an idea of ​​where prices are going and what kind of factors will affect them. What I have noticed is that even in times when equities have been strong, investor confidence has been weak and short-term speculation and fear have taken over.
It’s clear from the people I speak with that the new crop of investors is particularly prone to these panics. However, there is nothing strange in this. You need experience to be a seasoned investor, but it’s important to understand what experience is like. We all have heard the old saying that experience is the best teacher. While this is undoubtedly true, there is a complication to this truth—a good teacher is bad experience while good experience is a bad teacher. New investors who have only seen good times have not gone to that good teacher’s classes.
When a newbie starts investing and then goes on for several months (maybe years) and the market keeps going up, the experience they gain is on the calendar, but not on their mind. I know because I’ve been through it. In fact, this kind of experience is a negative experience, meaning that most of the time it will make a person a worse investor, not a better one. It will create nothing but overconfidence. As I read in a recent tweet, everyone has 30 points higher IQ in bullish times.
When one starts investing and only good times come for a while, he/she gets a distorted view of reality. You keep investing and money keeps on growing and you normalize it. One can attribute it to being genius, or start to realize that things are meant to be that way. And then came the bad times. Depending on how bad they are, the blow can be small or big, or even bigger. However, there is no avoiding it. It comes in the life of every investor, usually several times.
When bad times come, the formula is very simple. If you are one of the new crop of investors and you have made a careful but lump sum investment, stop watching it! Don’t pay any attention to the daily value of your holdings. Nothing is more damaging than weekly or fortnightly setbacks and recovery. Be it a group of stocks or mutual funds, the basic logic of making a good investment and waiting will work itself out. To make your portfolio at a good value it is more important to keep investing regularly and take advantage of the low points in the value cycle.
There is only one exception to these basic rules – if you are dealing with short term funds. By this I mean money that you will need in the next year or two and cannot afford to lose. Investing short-term money in equities is always a bad idea and a particularly terrifying option at a time when the world is barely recovering from unexpected shocks. If that’s the case then you should cut and run, there are no two ways about it.
It sounds weird to say, but other than that, new investors should probably be thankful for uncertain times—an experience like this is just a teacher we need.
(The writer is CEO, Value Research)