Too many investors, when faced with a market correction (a drop of at least 10 per cent) or a bear market (a drop of 20 per cent or more), get the urge to join in a lemming-like stampede to wealth destruction. It is part of a cycle of ‘buy high, sell low, repeat until broke’ emotional investing. But every crisis-induced market meltdown is followed by a recovery. This time will be no different.
In a way, investing in stocks is like buying canned tuna fish. You’re buying something you don’t plan to use for a while. Unless you’re a day trader, you probably have your retirement needs in mind while building your portfolio. And if you’re going to have tuna for dinner tonight, you probably would prefer fresh fish and keep the cans on your pantry shelf until you need them.
You are also a responsible shopper. After all, it’s your family that you’re shopping for and you want them to have a healthy, balanced and varied diet. And, as in most families, you probably have to cater to a number of taste preferences. (If you’re buying tuna for your cat, you’ll know it’s probably fussier than your kids when it comes to what brand they’ll eat.)
Weighing values other than price
Maybe certain ethical issues are also important to you as a shopper. Does the cannery take care to acquire its tuna stocks from sustainable sources? Do the cannery and its suppliers treat their employees fairly? Does the cannery take care that its fishing fleet avoids practices that result in thousands of sharks and sea turtles being destroyed. Does the fishing fleet take care to avoid harming dolphins that commonly swim with large schools of yellowfin tuna?
And, almost certainly, the price of a can of tuna will determine its place in your family food budget. Being such a careful well-informed shopper, you are also well aware of the price of your favourite can of tuna. Let’s say it’s $2.00.
The next time you’re in the grocery store, you see that it’s on sale for $1.00. Wow! Half price! Two for the price of one! What do you do?
Don’t have a hissy fit
Do you refuse to buy it because it’s half the price of the same cans of tuna you already have in the pantry at home?
Do you bring your pantry supply back to the store for a refund at the sale price?
Do you vow you’ll never buy canned tuna again?
Of course not. What you’ll probably do is buy as much of the stuff at half price as you can carry home. And you’ll probably feel smug that you’ve made such a good deal at such a low price. You know your family likes this brand of tuna fish and this half-price sale is a great opportunity to stock up for their future needs.
You’re also confident that within a few days the price will be back up to $2.00—or more.
You probably see where we’re going with this analogy.
Buy a company’s shares as carefully as its products
You are also a responsible investor. You’ve built a carefully balanced, well-structured portfolio. Maybe one of the stocks you have bought is a food processing and packaging company.
You probably asked many questions before settling on that particular company as an investment. After all, it has to fit into your requirements to nourish a strong, balanced, long-term investment portfolio.
Maybe you also have ethical standards to guide your choice of companies to invest in. Does management of your company treat the employees fairly? Does management pursue policies guided by social, economic and ecological costs and benefits?
You certainly carefully considered the price of the shares you were buying when you made your purchase. Just like your cans of tuna, your stocks have a long shelf life. That’s why you bought this stock at the price you paid. So it would grow over time to provide you with wealth for your retirement.
But the next time you check the market you see that the price of your stock has gone down—way down. Do you say “Wow! Half price! Two for the price of one!” What do you do?
Knowing the price of everything and the value of nothing
Unfortunately, many emotional investors regard a new low price for their stock as a bad thing. Instead of seeing the new low price as an opportunity to stock up on something they value for its future long-term benefits, many emotional investors respond to this price change by dumping the stock and bailing out.
You’ll find your fortune falling all over town
These folks remind us of Al Capp’s Li’l Abner comic strip character Joe Btfsplk who always traveled around with a perpetual rain cloud over his head. How much better off would Joe have been if he had heeded Frank Sinatra and wore his umbrella-like hat upside down to catch all those pennies from heaven.
When the markets put your favourite stocks on sale you should be ready to scoop up these first-rate bargains just like discounted cans of tuna.
Our book is filled with more good common sense
The editors of our award-winning investment advisory service, The Investment Reporter, love simplifying the complexities of the stock market by using stories, fables, analogies like the one above, or whatever it takes to make a complex process easy to understand and navigate.
In fact they’ve put together a book for you that does just that. It’s written in a folksy, fire-side, fishing camp setting. (We all know the tall tales fishermen love to tell!) It’s called The Little Book of Investment Knowledge and you can get your own free copy just by clicking on this link: www.investmentreporter.com
The Investment Reporter, MPL Communications Inc.
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