Handling Market Stress

Cerise wrote:

I’m new to investing, and having trouble dealing with market stress.

I feel that I’m always too late or too early on entries and exits, and I worry all the time about how my portfolio is doing. On weekends, I worry about Monday morning and it seems all I hear about is how we’re at a moment of truth. Well, in my life, most moments of truth don’t go in my favor!

So, I was wondering, how do you deal with market stress?

It’s possible that you’re not cut out for investing. Not everybody can play baseball. Not everybody can act. Not everybody can design cars. Why does the world assume that everybody can invest? If it’s not for you, don’t do it. Just dollar-cost average into an index fund and forget about it. You’ll beat 80% of the loudmouths anyway.

If you are going to actively invest in an effort to beat the market, there’s a disposition that helps immensely. People who have it include Warren Buffett, Peter Lynch, Bill Miller, Charlie Munger, John Templeton, and Prince Al-Walid. Each of them knows what an investment is worth, at least by their calculations, and doesn’t pay a penny more than that. Then, if they prove to be early or late as you say happens to you, they react intelligently by either buying more or adjusting their calculations for future use.

Recognizing patterns also helps. Study history. Don’t read today’s investment news and commentary, read archives. I do it all the time. I learned more about the current credit crisis by re-reading coverage of the Savings & Loan Crisis of the late 1980s and early 1990s than I did by watching any current TV shows or paying attention to predictions of catastrophe. Knowing that we’ve seen it all before and are still here to witness it again provides confidence.

By the way, Cerise, you don’t even need to go all the way back to the S&L; Crisis for examples of this. Repeating patterns happen weekly.

For instance, you wrote that you hear we’re “at a moment of truth.” Do you know I addressed that very fear just two weeks ago in response to a note from a reader named Susan? I concluded in that article:

I don’t think I’ve ever spent a day researching stocks when I didn’t run into somebody saying “we’ll know more tomorrow” or “this is the decision point” or here we are at the “moment of truth.” Isn’t it always a moment of truth of some sort? The evidence is in, we all have an opinion, then we step back to see what really happens.

Generally speaking, there are five moments of truth in every trading week. They come on Monday, Tuesday, Wednesday, Thursday, and Friday.

Since the last moment of truth two weeks ago, the S&P; 500 hasn’t budged. (Well, it gained 0.6%, but so what?) So, apparently, we’re still at a moment of truth.

That idea was confirmed when I read in John Murphy’s Market Message just last night: “With financial and consumer discretionary stocks on the defensive once again, this could be a moment of truth for the two-month rally.”

See what I mean? If the market rises, it’s a moment of truth to see whether it can rise more or whether “the worm will turn” and it will head down again. If it falls, it’s a moment of truth to see whether it will fall more or confirm a bottom and head back up.

I recall moments of truth from each week of the two-month rally behind us, and just about every week all the way back to the time I first read a newspaper article about the market while sitting at my grandfather’s desk. Reading farther back in archives per my above advice has shown me that moments of truth have been with us always. So, get used to them!

Also, accept that the market is never all clear. For more on that, see my Dire Warning From BusinessWeek written last Thursday.

Beyond these investment-centric ideas, you manage market stress the same way you handle any of life’s stress. Have other interests. Have friends. Exercise. Have a hobby.

Among my investor friends, here’s what’s popular: skiing, hiking, traveling, ant farming, aquariums, and bonsai.

Regarding the latter three, all require you to step into another part of the world and to understand it at its level. The ants, the fish, and the bonsai don’t care what happened in politics, news, or on Wall Street today. Spending time with them allows you to stop caring for a while, too.

I’m a bonsai fellow myself. The beauty that’s possible with a little patience, drops of water, and tiny pruning shears is astounding. There are millions of gorgeous bonsai in the world. You can see some of them here and lots more here.

Imagine the serenity that can be yours with this sitting on a table in your office:
Rudi Julianto's Bonsai

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