It is common in market downturns to hear and read about mounting investor losses. Pundits talk about the hundreds of billions or even trillions of dollars of wealth that have been wiped out. Of course, some real wealth is wiped out in market downturns as overvalued stocks come back to earth and when investors lock in losses by selling as a result of fear or a liquidity crunch.
Ben Graham taught us a better way in The Intelligent Investor. “The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price speculation.”
To be a true investor has some requirements:
1) That you can reasonably value a prospective business before making an investment.
2) That you don’t overpay.
3) That you consider yourself a part owner in that business.
4) That you have enough cash from income or savings to not be forced to sell.
5) That you avoid leverage.
Perhaps most importantly, you need the right emotional framework to not panic when everyone around you is losing their head. There is no shame in feeling the pangs of fear when facing stiff quotational losses. We can’t undo the way we are wired. We can, however, choose our response to a given emotional reaction. As Steven Covey teaches, “Between stimulus and response there is a space. In that space lies our freedom and power to choose our response. In those choices lie our growth and our happiness.”