Updated: Aug 25
“You make most of your money in a bear market you just don't realize it at the time.”
This quote from value investor Shelby Davis is as true today as it was back then, maybe even more so. As I write this, the investment world is losing its collective mind. Some of the major players are way down, and their outsized influence in the market has the major indices down with them. So what are you supposed to do?
One of the most helpful concepts we’ve heard on market risk comes from Morgan Housel in a book called The Psychology of Money. In it, the author encourages us to look at risk as a fee for playing the game, not as a fine for doing something wrong. Look at it this way. A ticket is great, or a ticket is horrible, depending on the context. If you get concert tickets, you have a great evening. If you get a speeding ticket, it ruins your day. The first was a fee for something you enjoyed. The second was a fine for doing something you shouldn’t have done. We don’t mind fees. We hate fines.
So how can you tell if you are paying a fee or if you are paying a fine? If you have a financial plan, you might start by seeing if it is still on track. Often, our planning clients will respond to market turmoil with a yawn, because a 400-point loss in the Dow Jones does not keep them from taking the family to the beach next summer. When your gas gauge is full, you don’t freak out as easily.
So if you have confirmed that this risk is merely the cost of doing business, what might you do next? This answer certainly depends on where you are at in life. But assuming your short- and mid range needs are fully funded, these might be good times to buy. I was joking with 401K participants last week that when the Menards sign goes up telling us of their 11% rebate on the whole store, we all go buy garden supplies and dog food. When the market goes off by 11%, we are all tempted to lose our minds. But this is precisely when you make money. If you buy something at a good price, the eventual resale will take care of itself: you’re going to do ok.
A final thought on making money in the bear market: When the market goes down, it’s amazing how fast and hard it come roaring back. And it’s equally amazing how many folks miss the recovery because they had moved to the alleged safety of cash just in time to watch all their friends make back their losses. The Dirty little secret about trying to time the market on the way down is that you have to be right when you're trying to time it on the way back up as well. And as hard as it is to be that smart once, it’s nearly impossible to nail it twice. Way more investors have gotten burned trying, ourselves included. So we quite trying to nail the exact bottom or the exact top, and just accept that if the market gives buying opportunities to cash-rich investors, we take them. You might be wise to do the same.