No one knows when a stock (or stock market) has gone down. People may guess – and every analyst who hopes for some television fame will do – but no one, no matter how predictable they may be in the past, knows when a stock or a market has plummeted. Yes.
And, while it is tempting to wait for a good price as an investor, it is a dangerous game to play. Yes, you can get better value by waiting, but you can make yourself wait too long and miss an opportunity.
Down Market, Beer Market, Market Crash – You don’t have to follow any rules for whatever you want to call them. A market correction leads to overhyped companies that are undervalued, as well as shares of strong companies that have performed well.
Understanding where your work as a long-term investor (or at least the best way to raise funds) is at the bottom. Instead, it is selecting companies that have a bright long-term future, where today’s prices are unlikely to be significant, companies that have seen their share prices fall because they have no business fundamentals.
It’s not always easy to spot when you consider some examples:
There are investors and analysts who feel both ways in any of the above questions. But, the best thing about investing is that you only have to keep your money in stocks where you have deep faith.
What is a long-term investor?
Long-term investors see the market as an opportunity to add to their portfolio. Before you think about doing this, you need to think about what it means to be a long-term investor.
A long-term investor buys shares of a company that they want to keep year after year – basically forever. Typically, a long-term investor has an investment thesis – one reason – they want to own the stock. The thesis is that even if the company’s share price falls, long-term investors need to trust that stock.
Basically, a long-term investor checks in on their holdings to make sure that the company has not made any changes that cause it to deviate from that thesis. For example, has the CEO changed and the new leader made a big change in the management of the company? Or, something happened in the market that could change the way you view the company’s prospects.
Long-term investors understand that many companies – Amazon’s most famous example – may not deliver quarterly results, instead, their leaders make the best decisions for company success over decades, not quarterly. That’s why Amazon (for example, stuck) is willing to keep money-losing quarters where it invests in the infrastructure needed for long-term success.
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Such measures could lower a company’s share price, but it’s hard to argue that Amazon (and many other market-leading companies) view their business as a long-term enterprise, not the quarterly practice of publishing press releases.
How do you get rich in a bear market?
Down markets, beer markets and stock market crashes sell well companies. If you have a company that you trust (and probably already own) you can buy shares with full confidence that you are making the right choice for your future, even if the bear market continues and stocks fall.
Long-term means years, sometimes decades, and falling stock prices due to market conditions or macroeconomic conditions allow you to buy stocks and do what you know as the average cost of dollars. Instead of waiting for the best price here, buy shares with the permission of the fund at the average price you paid for the stock owned by the company.
A declining market actually allows you to reduce the average cost per share of your best holding if the share price falls below what you first paid.
The challenge – and that is a big one – is that long-term investment means you hold on to the stock for a long (or very long) period. At the moment, this may mean that your portfolio has taken a big hit, but if you trust the company you own in the long run, it makes sense to hold on to them and add them to those positions.
And, while I’m an advocate for long-term investing, I’m rarely alone because the legendary investor Warren Buffett has followed the same policy and made some famous quotes on the subject.
He said, “Someone is sitting in the shade today because someone planted a tree a long time ago.
Omaha Oracle regularly says two more things that illustrate this philosophy,
“If you don’t want to own a stock for 10 years, don’t think about owning it for 10 minutes.”
“Our favorite holding period is forever.”
Should long-term investment be your only strategy? Of course not, you can make money by becoming a more active trader. If you have more advice on long-term investing, check out TheStreet Smarts, a product designed to help you get started and build a long-term mindset. And, if you want a more proactive approach (or manually) with it, the portfolio powered by TheStreet’s Action Alerts Plus gives you access to world-class portfolio managers Chris Verses and Bob Lang, so you can see how they make money. In this scary time.