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Robert Stephens, CFA
Robert Stephens, CFA
Articles (358) 

Charlie Munger’s Tips on Controlling Your Emotions in a Crisis

Overcoming fear and panic could boost your portfolio's performance

April 03, 2020 | About:

The market crash provides an opportunity for investors to buy stocks while they trade on low valuations. In doing so, they have the potential to beat the market through generating high long-term returns.

However, emotions can easily get in their way. Falling stock prices may lead many investors to follow their peers in selling, rather than buying, quality businesses. They may also fail to fully consider a company’s investment potential because emotions cause them to act impulsively instead of using a considered approach to investing.

Therefore, following Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) vice chairman Charlie Munger (Trades, Portfolio)’s advice on controlling your emotions could be a useful step that improves your chances of taking advantage of this market crash.

Emotional difficulties

When stock prices are falling and your portfolio is declining in value, it is difficult to remain calm. Negative news flow, downbeat economic data and pessimism among other investors can make this process even more difficult.

It is even more challenging to buy stocks during bear markets. Many investors may worry about the long-term impact on their financial situation from a market crash. This may cause them to put off investments in strong businesses while they offer wide margins of safety. This problem has been identified by Charlie Munger (Trades, Portfolio):

“Most people are too fretful, they worry too much. Success means being very patient, but aggressive when it’s time”.

Although buying stocks during a market crash may cause some emotional discomfort in the short run, it can lead to high returns. Adopting a long-term focus, as Munger suggests, and actively adding quality businesses to your portfolio while they offer good value for money can enhance your long-term returns.

Herd mentality

Concerned investors may seek comfort from their peers in a market crash. They may, for example, be worried about the prospects for the stock market. This could lead them to follow the actions of their peers, which in many cases could be to avoid buying stocks until the outlook for the economy starts to improve.

However, following your peers is unlikely to enable you to beat the stock market’s returns in the long run. More likely, it will lead to you experiencing similar returns to those of the wider market. As Munger said, “Mimicking the herd invites regression to the mean”.

Over time, copying the decisions made by other investors is unlikely to be a successful strategy if you are aiming to generate higher returns than the market. To beat the stock market, you must sometimes be willing to not only avoid the herd, but go against it.

This may not be an easy task when the consensus among investors is strong, as it may be during bear markets. But being independent of the views of your peers can strengthen your portfolio’s prospects.

Sound decision-making

Although a market crash can cause fear among investors, it may also produce overexuberance. This can lead investors to fail to adequately consider a wide range of factors when buying stocks. For example, in the bear market, you may focus on the low prices available and fail to consider the financial position of a business or its economic moat.

Munger one said that “No wise pilot, no matter how great his talent and experience, fails to use a checklist”. Taking the time to check all relevant aspects of a business before buying it is likely to be a worthwhile use of your time. It could help you to unearth potential problems with a possible investment, as well as push to one side your emotions about a specific company or industry. This could improve your long-term returns and help you to outperform the market.

Disclosure: The author has no position in any stocks mentioned.

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