When there's blood on the streets
Updated: Dec 17, 2021
Thoughts on how to react in a falling market. Contribution to Forbes Magazine
For even the casual investor, this is a very well-known phrase and is alleged to have been said by Baron Rothschild who made a fortune with early knowledge of Britain’s victory at Waterloo while everyone else panicked fearing a French invasion.
Every time there is a crisis, you hear this phrase from your friends, your colleagues, and even your grandma. And every time it is mentioned, it is done so with confidence. Yet, when the panic is over, neither your friends, colleagues, nor your grandma are suddenly in the Forbes 100. Why is that?
Mainly because of the second part of the phrase – “Buy when there is blood on the street, even if the blood is your own.”
True investors, by that very definition, are invested and upon seeing this violent loss in their own value become paralyzed. Some jump in at the beginning of the fall but can’t handle the pain as the market runs them over like a freight train, sitting out the rest of the storm. Others will wait on the sidelines until there is some positive news or hope to jump in at a lower price. However, there is never a clear green signal that says “Hey everybody, it’s safe to come in, let’s get rich.”
On top of that is the heightened sense of fear and uncertainty. It’s not like one man alone can see above it. The fear is all-encompassing and causes a thousand unanswerable questions.
In 2008, people wondered if their cash in a bank was even safe. Today, we have the added issue of health and mortality creating more questions on whether the coronavirus can even be cured, is my job safe, am I safe, how will I manage fixed costs during the lockdown, when can life return to normal, what is the new normal, what businesses will come out of this still standing, etcetera, etcetera, etcetera.
We see headlines of the numbers infected and the deaths, the WhatsApp messages, and when it comes to the market, we read what the “experts” say, the doom and gloom club who talk about L curves, U curves, W, X, Y, Z’s and how this time we are in for the longest depression since the 1930s.
So, to cut a long story short, it’s very hard to be an optimist and actually buy when there is blood on the street. Herd mentality, not immunity, takes hold and the fight-or-flight hormone kicks in whereby we can’t see beyond 30 seconds let alone take a five-year viewpoint.
With all this, how does anyone cope? Here are a few thoughts from some of the best minds in the business such as Howard Marks, Warren Buffett, David Rubenstein, Peter Lynch and more. Please note that these are on a strictly non-advisory basis and with no liability to anyone with further disclaimers are at the bottom of the article:
1. Keep a sense of optimism, otherwise all bets are off. We have survived plagues and world wars and this time we have more ability and knowledge. One must be hopeful that science prevails.
2. Deleverage and rebalance the portfolio. In times of growth, companies that take on debt and expand are usually able to create value. This is unlikely to be one of those times. And luckily, in some cases the market has given you this chance to switch for free as a lot of stocks fall at the same pace during capitulation.
3. Continued to stagger in even when it hurts. And it does. One never knows when the bottom has been reached; averaging helps you be market neutral or else you will be simply sitting on the sidelines living with hindsight.
4. “Stick to what you know”. If one’s expertise lies in commodities say, perhaps it is not wise to pivot to health tech and try to jump on the digitization band wagon. One needs the ability to have courage in their conviction. Just because something is cheap today doesn’t mean that it can’t get cheaper tomorrow, even by 20%–30% from here. If one is calling their mum on what her thoughts are and whether a stock can go down further, then perhaps you haven’t done your research on the underlying intrinsic value.
5. Steady oneself and their stomach for continued volatility and violence. Today a daily move of up to 10% is the “new flat.” As long as one believes that this is just a temporal loss and not a structural one, then one can live with it. One may not be happy, but one must be mentally ready or stay out of the market.
6. In areas where one is more of a passive investor, you have to love the point by David Rubenstein - “don’t suddenly think you are going to become Warren Buffett.” It might be better sticking with a portfolio manager that one already trusts, with a long-term track record and a proven ability to navigate through tough times. It’s likely they already have experience; their portfolio is diversified, and they have full-time analysts doing the research.
7. Invest only excess money that one has and avoid leverage. When it rains, it pours. And today is monsoon season. To take guidance from another great, Howard Marks, one needs to understand where one is comfortable in the offence and defense positioning of their portfolio. To be on the offence and aim for returns, one should acknowledge that capital is at risk. To be more defensive, one should appreciate that the comfort of safety means lower yields.
And last but not least, in all aspects today, one can hold onto the belief that “All of human wisdom is summed up in two words, wait and hope”. – Alexander Dumas.
The writer’s opinions are his own and do not constitute financial advice in any way whatsoever by him or First Water. Nothing in the article constitutes investment recommendation, nor should any data or content be relied upon for any investment activities. It is strongly recommended that you perform your own independent research and/or speak with a qualified investment professional before making any financial decisions.
LEGAL INFORMATION AND DISCLOSURES
This article expresses the views of the author as of the date indicated and such views are subject to change without notice. The author and First Water has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.
This article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, he cannot guarantee the accuracy of any of the information provided above and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Use information provided above at your own risk.