Investing is hard.
Anyone who says otherwise lacks either experience or wisdom… or both.
Investing is hard because stock prices do not always march in lockstep with economic growth or technological progress.
Because of the inherent ebbs and flows of the market, we investors will always endure occasional setbacks on the road to capturing our investment gains.
As a result, one annoying truism of investing is that we always seem to be holding too much cash when the market is rising, and never seem to be holding enough when the market is falling.
That’s unfortunately just the way things go; there is no perfect, all-weather approach to managing risk.
However, long-term investing is both a science and an art.
That’s why I recommend taking profits along the way, while still continuing to invest in the most promising investments you can find, no matter what the market environment might be…
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Don’t Let “F.O.L.M.” Reign
Successful investors deploy their profit-taking strategies over the span of years, then measure their gains as hundreds – or thousands – of percentage points. But the road to those double- and triple-digit gains often encounters jarring potholes along the way.
I don’t expect a blockbuster performance from the stock market in 2023. Instead, I expect the market to resemble an indie film festival that features a few standouts amid of collection of forgettable films.
As such, I recommend pursuing a disciplined, long-term strategy that is panic-resistant.
Cash is an essential component of that strategy – as we talked about earlier this week – both because it provides a buffer against selloffs and because it provides the ammunition to take advantage of market weakness, just like it did during the COVID-19-triggered panic of early 2020.
On Mar. 19, 2020, the Nasdaq Composite index had tumbled 30% over the previous 30 days. The brand-new COVID-19 pandemic terrorized the planet and terrified investors. But on that day, I delivered the following message to my subscribers…
F.O.L.M. might soon become F.O.M.O.
At this moment, the fear of losing money (FOLM) is the prevailing investor sentiment. But I would not be surprised if this sentiment flipped soon to the fear of missing out (FOMO)…
The white noise of nonstop doom-and-gloom completely muffles any hopeful observations or helpful insights…
Not surprisingly, fear is the emotion du jour. In fact, you could say that fear is in a bull market…
At times like these, it’s helpful to remember that financial markets are cyclical creatures. They cycle through bull markets and bear… through episodes of greed and fear.
Whenever either one of these sentiments reaches an extreme among the investing public, the stock market typically reverses course and heads in the opposite direction.
In other words, investors tend to become extremely bullish at major stock market peaks, just before a selloff begins. Conversely, investors tend to become extremely bearish at major stock market bottoms, just before a new upswing begins.
These patterns have repeated themselves over and over again throughout the history of market booms and busts… That’s why so many of the greatest investors throughout history pushed themselves to invest during the stock market’s darkest hours.
These investors understood, correctly, that crisis creates opportunity — the opportunity to achieve extreme investment success that accumulates wealth.
BUT IT IS NOT EASY. IT IS HARD.
The kind of success folks like Warren Buffett and Sir John Templeton achieved often began by looking like failure. That’s because the earliest buys into a terrible market usually move lower first, before moving higher.
With this essential thought in the forefront of our minds, I continue to recommend sifting through the carnage to establish new positions in select stocks, bit-by-bit. I recommend buying into this market, knowing that the reward may not be immediate. In fact, the path toward success may seem a lot like trudging across Death Valley to find a case full of gold on the other side.”
After providing this perspective, and mentioning the important caveat that success might not be immediate, I recommended three stocks that day…
- Ivanhoe Mines Ltd. (IVPAF)…
- Royal Nickel, now called Karora Resources Inc. (KRRGF)…
- And Galaxy Resources.
As fate would have it, fortune smiled on the brave that day.
FOLM flipped to FOMO almost immediately, as the stock market bottomed just four days later… and those three stocks started rocketing higher.
As of today, Ivanhoe and Karora have chalked up gains of 390% and 131%, respectively. I closed out the Galaxy trade in the spring of 2021 – the first one-third of the position for 285% in 350 days, and the final two-thirds of the position for 500% only 47 days later.
The Revenge of Caution
This retrospective tale demonstrates the kind of success that can result from investing into the teeth of scary, bear-market selloffs.
But obviously, success rarely arrives as immediately as it did in this case. Instead, a bear market will usually punish the first folks who dare to “buy low” in the midst of volatile conditions.
That’s because we investors can never know when a cheap stock is cheap enough, nor the precise moment when FOLM might flip to FOMO. But we can maintain a disciplined, long-term approach to investing that can survive the difficult times… and then thrive as conditions improve.
In other words, the best defense is a solid offense, which means focusing on the best risks, while saying “no” to all the others. It does not mean that we will never suffer losses, nor that every recommended trade will outperform the market over every timeframe.
The stock market’s turbulence is not the end of the world, as frustrating as it may be.
But it is a helpful reminder that stocks sometimes fall… and that our investments may not meet with an immediate reward.
Regards,
Eric Fry
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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
