Share market corrections and bear markets… who loves them? Maybe you should…
Actually, share market corrections are rarely called as nicely as that. They’re always called a market crash. The mainstream media love them. Regardless if they have nothing to report; minute by minute news ‘breaks’ announcing how much money has been ‘lost’ and boy, do they use some terrifying graphics.
It gets hectic and it doesn’t take long before panic – the mother of all fears, sets quietly in.
This sounds like a scene from a horror movie but unfortunately it does reflect reality. Thousands of people use main stream media as guidance when it comes to making investment decisions (or any money related decisions for that matter).
I’m not going to let you subscribe to that madness…especially when the truth can’t be more liberating.
What I’d like you to get out of this blog post is to love the market corrections … welcoming them, seeing why they have to happen, how little they mean in the long run and how much advantage you can take out of them – if you only process them the right way
The difference between the mind of a victim and a mind of an opportunist
First of all, let’s start calling things right names.
Crash is something definite, irreversible. Planes crash … cars crash. Markets don’t crash… markets correct. Their permanent growth is randomly interrupted by temporary declines. (Please notice the use of the adjective temporary). These happen often for no apparent reason, we can’t predict exactly when they happen and we don’t have to.
Secondly, the way you process a market correction doesn’t change the nature of it and it doesn’t change how much the market goes down or how long it takes to go down and back up.
It changes the only thing we can ever change. And it’s the way we experience the market corrections.
There is an old Zen parable that speaks of two monks; sitting on a hill, watching a flapping pennant in the wind.
The first monk says: ‘The pennant is moving, the wind is not moving’.
The other monk says: ‘No, it’s the wind that is moving, the pennant is not moving’.
A third monk happens to walk by and he overhears the conversation. He turns his head and says to his friends: ‘The pennant is not moving…the wind is not moving. Your minds are moving’.
This parable precisely describes what happens during a market correction.
You see, what actually happens in the market itself is infinitely less important than two things:
- how surprised people get, and
- what do they think is going on.
And although the market correction is not predictable or controllable in any scientific way, these two things affecting how your ‘mind is moving’ are totally both predictable and controllable and I will argue also avoidable.
1. The element of surprise
It wasn’t that the market went down 50% between 2008 and 2009 that mattered. What really mattered was how surprising it was for many… how unprepared, shocked and surprised many people really got.
We, humans, love fairy tales. When we experience good time, we want it to last. Sometimes, we want it so badly, that soon, we start believing that it’s not going to stop.
When we look at the events prior to the GFC (or the Great Panic), a few years of consistent and smooth double digit returns in the market, we simply slipped into this state of a false comfort. Finally, we said, the market performs as it ‘should’… (Now it’s finally the good time to invest, right?)
The minute you bought into this fiction of the ‘new era’ and you presumed for the market to only go up from that point onwards, there was no way you’d be ready for the market to come down 50%.
Of course, the market didn’t go down any more or less for you than it did for somebody else. The difference was – you got surprised. And by getting surprised, you were basically that much less able to:
- deal with it
- make sense out of it
- have a ‘battle plan’ (which is largely a psychological battle plan) for waiting out the correction.
2. What do you think is going on?
It doesn’t matter how hard the wind is blowing and it doesn’t matter how hard the pennant is flapping… What do YOU think is going on?
If you think this the end of the world, you’re going to panic out and sell.
If you think, this time it’s different, you’re going to panic out and sell again.
If you think the market will just keep ‘crashing’ down, and even if it will stop one day, it will take a hundred years for it to come back, you’re going to panic out and sell!
If you think that something so major happened in the economy that the market cycle has been repealed and the companies will stop making profits from now, you’re going to panic out and sell.
All this has nothing to do with the wind and it has nothing to do with the pennant… This is just ‘your mind moving’.
I think you might begin to understand by now that rather than studying corrections, we should focus on how people process the idea of a correction (and from my perspective of a financial coach how passionately they’re coached).
Simply because this is what’s going to make all the difference. These are all the behavioural variables and therefore, these are all variables under our control. But you need to recognise it and your investment adviser needs to recognise it.
Otherwise, all will be lost.