Financial crises are events that generally cause a lot of panic amongst the majority of investors, both amateur and professional. However, for a small minority of exceptional investors, such occasions become periods of opportunity. Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) are two examples of investors who have done well during downturns. Baupost Group founder Seth Klarman (Trades, Portfolio) is another. In a 2008 article entitled, "The Value Of Not Being Sure," Klarman gave aspiring investors three tips for how they should approach bear markets.
Keep an eye on the long term
A key psychological barrier that prevents most people from seizing the day when prices are low is the fear that the turmoil of today will continue forever. In actuality, bear markets are typically much shorter than bull markets. As the saying goes, markets take the stairs up and the elevator down:
"It is easy for the volatility of one's thinking to match the volatility of prevailing conditions. Time horizons have shortened even more than usual, to the point where the market's 4:00 p.m. close seems to many like a long-term commitment. To maintain a truly long-term view, investors must be willing to experience significant short-term losses; without the possibility of near-term pain, there can be no long-term gain."
Concentrate on your process, not on achieving a certain outcome
Can a correct decision have a bad outcome? Can a wrong decision have a good outcome? The answer to both of these questions is yes. In investing, as in all walks of life, we are not fully in control of the outcomes of our choices. It is possible to lose money by doing the right thing, and it is possible to make money by making bad financial decisions (in the short term at least). The only thing that you can really control is your process.
For instance, if a business is trading at 50% of its intrinsic value, then it is clearly the right decision to invest. Does this mean that this bet will definitely pay off? Of course not, because, as we know, nothing is ever 100% certain. But most successful investors don't become millionaires overnight as a result of a single lucky guess. It takes years of correct decision-making.
If your process is sound, then over time you should end up with more good outcomes than bad ones. Klarman believes that it is vitally important to not lose track of your process and to succumb to the temptation to think in the short term. You'll be much more likely to succeed if you think in terms of years rather than days.
Disclosure: The author owns no stocks mentioned.
Read more here:
- The Value Investor's Handbook: The Enduring Appeal of Value Investing​
- Warren Buffett: Owning Part of a Business vs. Owning All of It
- Howard Marks: The Federal Reserve Cannot Prevent Market Cycles
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