Economist Russell Napier is one of my favorite authors to read. Napier could be described as somewhat of a perma-bear. He's always looking out for the downside and finding bad news to consider.
That's one of the reasons why I like his work. Wall Street tends to be over-optimistic, which can lead to a sense of false security. Napier, on the other hand, is always advocating caution.
A student of bear markets
Napier is a student of previous bear markets and has authored a book looking at all the traits of great bear markets going back for the past 100 years.
His book, "Anatomy of the Bear," was first published in 2007. It was then updated in 2016 to review the lessons of the financial crisis.
The first edition of "Anatomy of the Bear" looks at the four significant market crashes of the past 100 years through 2007: 1921, 1932, 1949 and 1982. Napier reviewed more than 70,000 articles from the Wall Street Journal written during these periods to get a sense of the markets.
So, Napier knows a thing or two about bear markets. More importantly, he has a wealth of knowledge on how investors react in these times. In 2019, Napier spoke with the evidenceinvestor.com in a wide-ranging interview. One of the questions the interviewer asked Napier was in regards to mistakes.
Specifically, the interviewer asked, "If there's one thing investors can do, then, to reduce their chances of making mistakes, what would it be?" Here's how Napier responded:
"I think the most important thing to do is to try to understand ourselves. It's very easy to look at the markets and say you need to understand a particular market. I would say every one of the greatest disasters I've seen in finance happened because people didn't understand themselves...
What investors have to do is try to calibrate their own risk perspective, realise how much they know and how much they don't know, hand over those bits to other people, and not get carried away constantly trying to prove that they're smarter than the market. That is when the great calamities occur, when you try to be smarter than the market.
Don't do that much — that's one of my simple pieces of advice. Some of the best investors in the world do almost nothing. So buy things when they are cheap, hold them, diversify across a wider range of assets and markets, but truly try not to do very much at all."
Considering his research and understanding of how investors react during times of market volatility, this advice is highly valuable. Napier has spent years studying the biggest market declines of all time, and his best advice is for investors to do nothing when markets begin to turn downwards.
This correlates with the advice of well-known investors such as Warren Buffett (Trades, Portfolio) and Seth Klarman (Trades, Portfolio). So, while it may be tempting to make adjustments to your portfolio in these tough times, remembering Napier's advice might be sensible.
Owning a range of different assets and investments across various sectors provides diversification against uncertainty. It is also best to avoid anything you don't understand and know your own risk tolerance. Remember, it is highly unlikely that you are smarter than the rest of the market.
Those are the key takeaways from Napier's advice. Stick with what you know, own a diversified portfolio and above all, do nothing. Like so many bear markets in the past, this too shall pass.
Disclosure: The author owns no share mentioned.
Read more here:
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