Face the Market Optimistically

【Face the Market Optimistically】CLEC Club

Written date: Dec. 25, 2018

The recent market volatility, or more accurately the sharp decline that may also be a very deep drop, has made many investors very fearful. That is understandable. But Buffett should be very excited now. This is the biggest difference between value investors and trader-type investors.

In life, some things are within our control, and we can work hard to complete them. Some things are natural phenomena. We cannot predict them, know them in advance, or avoid them. When heaven wants rain, and when a mother wants to remarry, there is no stopping it. This old saying has an interesting story; everyone can search Google for it when there is a chance.

Before everyone continues reading, let me give a conclusion first: no matter how much further the market falls, even if it falls another 10% or 30%, it will eventually come back after a few years. The important question is whether you have prepared two or three years of living expenses, or whether your living expenses over the next two or three years will be a problem. If they will be a problem, you should reduce stock holdings and keep some cash so you can eat well, sleep well, and have no worries.

Many investors try to predict the market and use various methods to capture the maximum profit from volatility. Although sometimes some people do get it right once or twice, that absolutely does not mean they have the ability to predict the market. It can only be called coincidence.

I have said before that we avoided the 2000 bubble and the 2008 subprime mortgage crisis, but I can only say that was mostly luck. We had the chance to avoid the declines because we were operators, or speculators, not value investors. Operators are always preparing for market panic declines or bubble declines. Although we avoided the bubbles in 2008 and 2000, many people may not know or may not remember that before those bubble declines, we had already gone back and forth trying to avoid bubbles and declines, making wrong trades at least four or five times. Operators are always preparing for market panic declines or bubble declines. Frequent trading causes them to lose the opportunity for the market's long-term gains.

Based on our past trading, we probably would have left the market in early December. But suppose we really had left in early December. In the short term, it might feel as if we were right, but we could not prove that we would ultimately be able to judge the bottom. We could not sell the top at the high, so of course we cannot assume we would buy at the lowest point. By the time the bottom formed, it might already have returned to the early-December low. Or we might wait for a slow recovery and only start buying after the market reached that early-December low again or rose above it. In the end, all our operations might bring no real benefit. The only benefit would be not being frightened during the entire decline. But if we traded this way, the opportunities lost and taxes paid over the past few years might have erased half the profit.

If we had not insisted on value investing, we might not have been able to continue profiting through 2016 and 2017. Although 2018 had little profit and may even have losses, it probably will not fall back to early 2016. New students of course have a harder time, but although we cannot decide our birth, we can decide our own future.

Imagine what Buffett is thinking now. Buffett should be excited. Although the market is fearful, Buffett is greedy. As we slowly change our mindset, focus on value, and care less about stock-market volatility, we will gradually become true value investors.

Risk control for value investors and speculators

• Risk control for value investors and speculators is different.

• Speculators use technicals and indicators to make buying and selling moves. Their risk control is to sell and leave the market when they encounter danger.

• Value investors keep most positions in the market. Their risk control is based on capital allocation, usually 30% cash and 70% stocks and index funds.

• Speculators are constantly buying and selling. Value investors are rebalancing.