“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria,” John Templeton, one of the world’s most successful mutual-fund managers, had said. “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Buying at the time of maximum pessimism is exactly what I plan to do if and when the stock market crashes. Stock market is the only place on earth where people rushes for the exit during a sale. Such are the times when fundamentals do not matter much, as a falling tide sinks all boats. Nevertheless, such trying times also offer opportunities for cherry-picking among stocks of fundamentally strong companies on sale at bargain prices.
While stock prices may dive further after I buy, I’ll be in good company of Peter Lynch, often referred as the mutual fund wizard. He had famously quoted that “When stocks are attractive, you buy them. Sure, they can go lower. I’ve bought stocks at $12 that went to $2, but then they later went to $30.”
While I’m not immune to greed and fear, I strive to overcome herd mentality and emotional trading by staying calm, acting on the contrary or simply doing nothing rather than joining the mass party.
Admittedly, fear of missing out runs high when a stock that I’ve been eyeing for long re-bounces from its bottom and shoots through the roof. My value investment philosophy runs the risk of giving way to the temptation to buy before the boat finally leaves its berth without me.
On the other hand, when a stock sinks as investors rush for the exits, I’ll be afraid to be the last person holding the ball when the music dies.
In these circumstances, I would constantly remind myself on the wise words of the legendary investor Warren Buffett to be fearful when others are greedy and to be greedy when others are fearful.
I would check and then reaffirm whether the company fundamentals have altered so much that would justify the stock’s drastic movements.
Rather than falling prey to herd mentality and FOMO, I would try to be contrarian in my investments, buying when signals emerge that a stock has been oversold and all market fear gauges are buzzing off, while selling if signs appear that a stock is overbought and mom-and-pop rush to buy it.
To me, cash is king and doing nothing may be best at times of market volatility. In fact, cash in essentially risk-free assets now constitutes the highest proportion of my portfolio, as I hunt for the best risk-free returns every month, building my war chest for the eventual bloodbaths on the streets.
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