Wealth Can Be Created On The Way Down In The Stock Market. It’s Just Not Obvious. Here’s How.

Wealth Can Be Created On The Way Down In The Stock Market. It’s Just Not Obvious. Here’s How.

The front page of the Brooklyn Daily Eagle newspaper with the headline ‘Wall St. In Panic As Stocks … [+] Getty Images Warren Buffett’s lesser known right hand man Charlie Munger once said, “If you’re going to invest in stocks for the longer term, there are going to be periods when there’s a lot of agony. I think you just have to learn to live through them.”

The Pump & Dump

The last ten months have been very rough to say the least if you are a stock investor. The S&P 500 Index is down 22 percent year to date, but that isn’t representative of the base of the 24 million new investors that have come to the market in the last two years.

Many popular held stocks are down a great deal more and the technology sector has been decimated. Investors have been heavily selling off growth businesses on the theory that the companies that performed best during boom times will be disproportionately affected by the rising interest rates and inflation we are now enduring. The NASDAQ is down 30 percent year to date. We are having a very serious correction where the economy was pumped with trillions of dollars of stimulus checks and other monetary aid. The “stimmies” were responsible for opening up a host of brand new Robinhood trading accounts from mainly furloughed individuals who were unable to bet elsewhere (such as sports), which in turn propelled the stock market to all-time highs and pushing the S&P 500 to a huge 27 percent gain in 2021. Sadly, the rally is looking like it had as much substance as cotton candy, and is now disappearing from sight.

So the fun times are over. Those days of watching stocks go up with quick profits are gone for the foreseeable future it appears. With some of the most darling popular (Meme) companies at the time losing between 50-70 percent, and in some cases, like Peloton Interactive, Inc. (PTON) losing over 90 percent of its value, it has forced some investors to either throw the towel in or turn into unwilling “long-term investors” with companies that may never see the light of day again. Refer to the fallout from the 2000 collapse.

Historical Perspective

So what should you do now? Before we get there, let’s look at what is going on and try to put a little perspective behind it. A good index full of quality companies will go up over time because quality companies simply grow. The trouble is that it’s not always in a straight line. I’ve been around nearly 35 years in this space and if you are a novice, you’ll soon learn that quality equity indices are likely to maintain a long-term rising trend with just small breaks between the larger cycles. Let’s assume we are speaking about the S&P 500, a stock market index tracking the performances of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices with some of the best companies in the world as constituents.

According to what we are hearing from the media, the world economy is in a mess. You may be hearing all the bad news at the moment and wondering why are you even invested in stocks. I would tend to agree with you. Losing money is extremely hard to justify in any scenario, but hold on a minute. The chart below shows the performance of the index since the infamous 1929 crash. There were plenty of “bad” events during the journey up until now, but on a longer term scale, they really didn’t even register and buying every dip resulted in some great gains if you had the stomach to act upon it. As an investor, you must be also be aware that the market will occasionally decline. You shouldn’t own stocks if you’re not prepared for this. And when it occurs, it’s a positive.

As the great investor John Templeton once said, “There will be bear markets about twice every 10 years and recessions about twice every 10 or 12 years, but nobody has been able to predict them reliably. So the best thing to do is to buy when shares are thoroughly depressed and that means when other people are selling.” He’s been correct and there is no reason to think any differently going forward. The trick is to take out the emotion when the media (and sometimes your close friends) are full of doom and […]

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