People think a lot about price in markets, but they don’t think much about time.
Case in point: the coronavirus crash of March 2020. Stocks dropped 35% (which would rank it among the top great bear markets in history), but they only stayed down for a couple of months. I’m sure most people do not consider it to be one of the great bear markets in history. It happened so fast that nobody sold, and then everyone was bailed out. It ended up being a hiccup in the context of a great bull market.
The financial crisis was admittedly terrible, but not as terrible as you think—from the top in the summer of 2007, to the bottom in March of 2009, it was only 21 months. That’s much shorter than the Great Depression, and even shorter than the dot-com bust which lasted three full years. I remember that well, and in some respects, the dot-com bust was worse because it seemed to go on forever.
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If we are going to have a bear market, pray that it is short. Not shallow, but short. Time is what influences investor behavior. After the dot-com bust, nobody day traded again for 20 years. No one had the appetite for it. We’ve seen a couple of these cycles play out in the crypto markets as well, where you have long periods of “crypto winter.”
This brings up some interesting behavioral finance points. If you find yourself in the midst of a bear market, and you haven’t sold, it is probably a good idea not to sell. Just ride it out. I did hear some stories of people panicking out of stocks on the lows in March 2020. Oops. You see, time heals all wounds. There aren’t too many trades that can’t be fixed by time. Sure, some companies go out of business and disappear, but many don’t—like our friend Crocs (CROX) here.
CROX was the ultimate fad stock that took a dirtnap, traded below a dollar, and then had a second incarnation. If you are down 95% on your investment, there isn’t any need to sell, unless seeing the ticker every time you open your brokerage account is depressing you. Just hang on, and maybe it will be worth something. I can assure you of this: sometime, far in the future, those Beanie Babies will be worth something.
As for the major indices, there has only been one time in history when stocks went down and stayed down: 1929–1946. Not to be pedantic, but if you were willing to wait 17 years, you would have recovered your losses. I have had some big losing trades in my career that I waited out simply because I had the patience. Of course, professional money managers cannot do this—they’ll get the tap on the shoulder. But you can do this if you have the patience and intestinal fortitude.
Stuff takes time to work. Lots of people, myself included, put on a trade and expect it to go up immediately. In fact, I recently had a trade where that happened. Fell ass-backwards into money. But it usually doesn’t work out that way. You put in a trade, it goes in your mush, you’re down 5%, 10%, 15%, and then you’re faced with choices. Do you wait it out? Do you buy more? Do you have discipline and cut your losses?
By the way, I am not discouraging you from having discipline. It is good to sell things that have dropped 5% because they will often go on to drop 15%, and then you are faced with those uncomfortable choices. But I’m a big believer in giving trades time to work. You do all this research on a stock, your conviction is high, you put it on, and then you take a drawdown. Demoralizing. Do you sell it and throw all that research out the window? Or do you have a little patience with it?
Good investors have patience—they recognize that ideas take a long time to play out. And that’s not just true of the downside. It’s true of the upside, too. People have a 10X idea, they buy the stock, and then sell when it goes up 30%. And then it goes up 10X. Remember, do what works. If you have a trade that is working, do more of it. Buy more. Have the courage to be a pig.
One thing that helps with time is distance. If you’re being patient with a trade, best not to look at it at all. Don’t look at it for a few weeks. Go out and wash your car, or mow the lawn, or read a book. Let the market do the work for you. Looking at it every five minutes isn’t going to make it go up. Quite the contrary, it’s going to make you miserable, and then when it does go up, you’re going to sell it immediately. Put down the phone.
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Jared Dillian
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