Fear and the Stock Market
No doubt a lot of you, scarred by the GFC, by the 2020 pandemic-inspired drop in the market, or by the current sell-off, are constantly worried about a significant market correction. It’s no fun investing in “fear” and if that’s you then let me tell you about fear and in so doing rid yourself of the constant worry that the stock market is about to fall over and destroy your financial expectations.
Sidenote – Anyone who is wealthy, inactive, or incapable of selling anything, can stop reading here.
First, you need to understand fear.
There is always, always, always something to fear when to comes to the stock market and fear is good because it’s the fear that creates opportunities. Rather than avoid fear, you should welcome it. It is in the grip of stock market fear and exuberance that the most money is made in the shortest timeframe.
You should also understand that when fear starts, we will perpetuate it. Fear is great for us, for the financial media, the brokers, the financial planners, the fund managers, for financial advisers, in fact, it’s great for the whole finance industry. Some commentators make a living out of fear, like Nouriel Roubini or Marc Faber with his Doom and Gloom report. Why? Because fear triggers insecurity which drives investors to us. Fear is the sheep dog of financial services. It rounds up the sheep so we can shear them. Yes, the sheep, that’s you.
Fear is also a powerful magnet when it comes to attracting eyeballs and in a competition for clicks, when investors are at their most fearful, the clicks and eyeball numbers explode. Everyone wants advice and we will provide. Advice is the Trojan Horse of our commercial purpose. Fear achieves that for us. It is so much more effective than common cheerfulness.
Fear and Clickbait – Clickbait in its natural form starts with the words “5 Things…”. To capitalise on that we chuck in some of the top clickbait keywords, and then, if the glorious moment (as now) presents, we throw in some fear. “5 Things”, the keywords “Warren” and “Buffett” and a small sprinkling of fear, and you have the most commercial headline in finance. It goes like this.
“5 Reasons Warren Buffett thinks the stock market will Crash”.
Publish and wait.
The bottom line is that fear is just part of the great game that is the stock market (any market). It creates the lows, it creates the best opportunities to make money and for the finance industry, it is gold. Whether it is a broker looking for an order, a media person looking for attention, or a financial planner looking to convince a client that they need them, fear gets more traction than optimism, fear gets attention, and fear gets clicks.
So when the stock market drops 5% in a day there are a few things you don’t do. You don’t join in! Fear makes you vulnerable as an investor. It distorts your normally objective state of mind. If you get fearful when the market loses its head you become part of the herd. Far better you recognise it for what it is, an emotional “moment” in other people’s minds, and think about how you can exploit it. It will vary depending on the sort of investor you are the and sort of risk appetite you have.
A PLAN OF ACTION FOR YOU – When the market loses its head in fear:
- Stay cold, objective, and logical. Be Spock. Look down on the fear, don’t join in. Being emotional will not help you, it will cost you.
- Accept what your shares are worth now. Don’t dwell for a moment on the highs and how much you were worth. The highs are gone and there’s nothing you can do about it. Anchor yourself to yesterday’s prices and it will deliver nothing but regret, upset and a feeling of stupidity. Look at the bottom of the spreadsheet. That’s what you’re worth. Accept it.
- Get excited. The market only presents great opportunities occasionally. One is coming. It is from moments like these that quick money is made.
- Take an informed guess at what you think is going to happen next. The only thing that matters is what’s going to happen not what has happened. Read the Marcus Today newsletter and decide for yourself if the sell-off is a blip or a trend.
- Decide what to do if anything. Understand that no one knows. Do your best. Just decide. And live with it. Accept the outcome right or wrong. The only crime is deciding nothing and letting it all happen to you.
So my thought process in the current sell-off has gone like this.
- Take ten seconds – For a few moments of weakness, I thought about how I could have called this earlier in the newsletter. Tiger Woods says you are allowed ten seconds to express your emotion after a golf shot. But that’s all. Take ten seconds. It’s good for you. But there’s nothing to be done about that now. It is what it is. Time to move on and decide what to do next.
- Identify the core issues – I read a lot (as always) and quickly (its pretty obvious) identified the core of the issues for the correction. Macro stuff. In this case inflation, interest rates and the fear of a US recession, with a sprinkling of China lockdowns and Russian risk.
- Decide if it’s a Blip or a Trend – I made an assessment of whether the main issues were likely to persist or turn on a sixpence. I decided they were more likely to persist.
- Do something or decide to do nothing – I sold the three market-related ETFs in our STRATEGY portfolio and almost every stock in our IDEAS portfolio. I’m good at selling, it’s a thing I do well. You should learn to do it. It’s cathartic. You wake up the next day hoping the market collapses rather than fearing it will. It’s empowering to have cash and be “Ready to go”.
- Take it day by day until the bottom – Now the game is to watch and wait for “Peak Fear”. The market will bottom one day. It could be Thursday (FOMC Meeting) or it could be in a year. You just have to take it one day at a time. Wake up every morning and react. There’s no predicting it. I know I’ll make more money in the recovery from the bottom, and more quickly than I lost in the last few days. If I can get it right, and if I can time it right for our subscribers, it will be fabulous.
And that’s how you approach this moment. With the intention to exploit everyone else’s fear.
By the way. You can time the bottom. Don’t listen to those feeble commentators that say you can’t. They want it to be impossible so they don’t have to do it. For financial professionals, it’s a lot more effort handling active clients than it is handling docile ‘buy and hold’ sheep and the more clients they can convince that timing can’t be done, the less activity they incur for the same amount of fees. Just saying.
You should welcome corrections and welcome other people’s fear. The most exploitable moments of the market are the fabulous exponential, irrational, exuberant bits at the top and the most fearful, despondent, capitulations at the bottom. They are the bits, the extremes, the opportunities, that make the market worthwhile. Those extremes, those moments of stupidity, absurdity, farce, ridiculousness and nonsense are brought on by other people’s irrational fear and irrational exuberance. You should expect them, look forward to them, and use them, not avoid them.
A good investor watches and exploits the herd. They don’t join the herd. Let that be you.
More about the author – Marcus Padley
Marcus Padley is a highly-recognised stockbroker and business media personality. He founded Marcus Today Stock Market Newsletter in 1998. The business has built a community of like-minded investors who want to survive and thrive in the stock market. We achieve that through a combination of daily stock market education, ideas and activities.