It knocked the stuffings out of the market.
Tuesday’s inflation data came in higher than expected.
The Dow Jones fell more than 1,200 points.
Nasdaq did even worse.
Later in the day, I was a guest on a podcast. (You can check it out here.)
The host asked me my thoughts on the market being down sharply.
I didn’t have any.
In fact, I didn’t even know the market was down.
I’m in Israel visiting my family and wasn’t keeping track.
The host was flabbergasted.
He was a short-term trader and followed every wiggle and jiggle.
I told him I gave up doing that more than two decades ago.
Short-term trading is a very hard way to make a living.
And I then told him there’s a better way to make money in the stock market…
In fact, the Forbes 400 list is filled with investors that made money with this very same approach.
And here’s how they do it…
No. 1: Predictions are a waste of time
“It’s tough to make predictions — especially about the future.” — Yogi Berra.
Yogi wasn’t kidding.
To see how tough it is, take a look at predictions made for 2020.
Barron’s rounds up the top stock and bond analysts each November.
They ask them to give their predictions for the coming year.
I checked their predictions for 2020.
The biggest threat to the markets was inflation.
Not one of them mentioned a pandemic shutting down the world.
I’m not beating up on them.
These folks are well paid, went to the best schools and have tremendous research at their fingertips.
And despite all of that, their predictions throughout the years have been pretty lousy.
I don’t blame them.
There are so many variables that come into play that trying to predict them is a waste of time.
Given how difficult — or near impossible — it is to predict the market, avoid forecasters and their predictions at all costs.
They are not accurate, they add no value and they have terrible track records.
No. 2: Keep your emotions in check
Stock prices will rise and fall.
Most of the time, this has nothing to do with the underlying business.
In fact, I’ve seen studies that show close to 80% of short-term fluctuations are the result of computer models trying to make small profits off of trade flow.
These models don’t care that Microsoft is a better business than Frank’s Hamburger Stands.
Their sole aim is to find small discrepancies in stock prices and squeeze out tiny profits.
So why should you care if stock prices fall one day or rise the next?
You can either react to every wiggle and jiggle of the stock price or ignore it.
If you know the underlying worth of the business, why should Mr. Market tell you how much it should be worth?
Especially if 80% of the gyration has nothing to do with the underlying business?
Sounds silly, no?
The second and better choice is to let Mr. Market serve you.
Use down periods to buy stocks when they go on sale.
And use up periods to sell stocks when they become detached from reality.
Because if you have an idea of the underlying worth of the business, the stock market is there to help you make money.
Don’t let Mr. Market be your guide. Most of the time he’s a terrible one.
No. 3: Know the type of person you are
“If you don’t know who you are, [the stock market] is an expensive place to find out.”
Over the past two centuries, stocks have returned close to 3X more than Treasury bills.
Stocks outperform — 3X more than Treasury bills.
So why doesn’t everybody invest in stocks instead of Treasury bills?
It’s because stocks are volatile.
If you can handle short-term volatility, you deserve the great returns stocks deliver.
If you can’t, then you need to be content with much lower returns.
There’s no free lunch on Wall Street.
Bear Market ✅
This cheat sheet can make you a better investor.
You won’t make any money by selling in a panic when stock prices drop.
But you can make money by using this time to buy.
The price you pay for high returns is volatility.
Legendary investor Shelby Cullom Davis put it this way:
A down market lets you buy more shares in great companies at favorable prices. If you know what you’re doing, you’ll make most of your money from these periods. You just won’t realize it until much later.
And that’s the Real Talk.
Bear markets allow intelligent investors to buy underpriced stocks.
If it weren’t for bear markets, we’d never have the chance to make these purchases.
And buying quality companies at bargain prices is the key to making money over the long term.
So, now’s an outstanding time to build your portfolio.
Founder, Real Talk