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Rupert Hargreaves
Rupert Hargreaves
Articles (610)  | Author's Website |

How to Invest in Falling Markets

What you should be doing with your money with equity markets sliding

February 08, 2018

As I write this, the Dow Jones Industrial Average is down by more than 500 points in yet another display of extreme volatility that has become the norm for this month.

How you act in these environments is crucial if you want to be a successful investor. Money is not made in bull markets but in bear markets when the best investors take the plunge and buy attractive securities at deeply discounted prices.

However, so many investors fail at investing because they don't have the skill or the confidence to be buying as markets are falling. Either that or they sell out completely and never return, preferring to stay on the sidelines nursing their losses.

“You make most of your money in a bear market, you just don’t realize it at the time.” -- Shelby Cullom Davis

Almost all of the most celebrated investors of all time made most of their money buying stocks when everyone else was selling. Investors such as Shelby Cullom Davis who made a fortune buying a New York Stock Exchange merely because it was cheap, having no use for it himself. He paid $33,000 for the seat in 1941 a colossal discount to its value of $625,000 recorded in 1929. His most prominent winners were insurance stocks, which traded at a deep discount to book value and low single-digit P/E ratios. He profited as earnings grew and the stocks re-rated.

“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” -- Shelby Cullom Davis

Having made most of his money buying when others were selling, Shelby Davis was acutely aware that market crisis was just a fact of life, something his descendants continue to register to this day:

"A 10% decline in the market is fairly common—it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealthbuilding power of stocks.” -- Christopher Davis

The most famous investor of all time, Warren Buffett (Trades, Portfolio) has also made the vast majority of his wealth buying when others have been selling. He has made it clear in the past; if you can't stand a 50% drawdown in equity values, then you should not be in the market at all.

“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” -- Warren Buffett (Trades, Portfolio)

A view that has also been backed up by investment legend Peter Lynch:

"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets" -- Peter Lynch

However, if you can stand a substantial drawdown, then it provides you with an excellent opportunity to increase your position at lower prices.

“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” -- Warren Buffett (Trades, Portfolio)

One of the tricks of the trade is not to try and second guess what the market is doing. The stock market is made out of millions of participants doing billions of transactions every day, and there's no rhyme or reason to wherer or how it moves. Therefore, thinking that you can try and predict market movements is a giant mistake. All you can do is invest in high-quality companies and over time, the prices of the shares in these businesses should reflect their improving underlying fundamentals:

“Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.” -- Peter Lynch

There's no better time to invest more funds in these high-quality companies than when their prices are falling:

"I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.'" -- Peter Lynch

So to sum up: if you want to make money in the stock market and you are thinking about selling as the market crumbles, remember this one phrase from Peter Lynch, "The key to making money in stocks is not to get scared out of them."

Disclosure: The author owns no stock mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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