Sitting still in a falling market
The hardest thing an investor does is nothing, at the exact moment doing nothing feels most reckless. A falling market is a test of temperament far more than of analysis.
A falling market is a test of temperament far more than of analysis. The research that mattered was done long before; what a decline asks is whether you can sit still, and sometimes buy, at the exact moment doing so feels most reckless. This is where long-term investors separate from the crowd - not in the analysis, but in the behaviour.
The businesses have not moved as much as the prices
In a sharp decline, prices move far more than the underlying businesses. A company worth owning at a calm price is usually still worth owning after a fearful market has marked it down - often more so. Anchoring to the value of the business, not the mood of the market, is what makes it possible to hold, and occasionally to add, while others are selling.
Prepared in advance, calm in the moment
Calm under pressure is not a personality trait so much as a product of preparation. An investor who understands every holding, who sized them sensibly, and who keeps some capacity to act is far more able to sit through a decline than one who is over-extended in businesses they half-understand. The temperament is built before the storm, in the research and the discipline.
Declines are where returns are seeded
It is uncomfortable to say, but many of the best long-term outcomes are seeded in the worst-feeling markets - because that is when good businesses can be bought at prices the calm years never offer. Doing nothing, or buying quietly, while the mood is at its worst is one of the most valuable and least natural things an investor can learn to do.
Got a question on what you have just read - on bottom-up research, quality investing, or the Category III AIF structure? Write directly to the office. These essays are general views only, not investment advice.
A research-led equity investor with over twenty years in the Indian markets. Designated Partner of Stonebridge Advisors LLP, Investment Manager of Anchor Rock Investment Fund - I, a SEBI-registered Category III AIF.