Why Real Investors Thrive on Fear: Patience, Optimism, and the Power of Buying During Market Crashes

Traditionally, the investor has been the man of patience and the courage of his convictions who would buy when the troubled or discouraged speculator was selling. If the investor must now restrain himself until the market itself encourages him, how will he distinguish himself from the speculator, and in what way will he deserve anything better than the fate of the ordinary speculator?” – Benjamin Graham

This quote appears in Graham and Dodd’s book “Security Analysis,” first published in 1940. It is clear that investment behavior has not changed much. Even 85 years ago, market timing received as much attention as it does today. It is tempting for people to make investment decisions based on the right time rather than the right price. Most still try to predict short-term market movement. An investor is expected to be someone who studies securities to acquire good companies at the right prices and hold them for the long term. If someone is solely interested in anticipating and profiting from market fluctuations, that person is not an investor but a speculator.

Buy when the market falls

Corrections or declines in the bear market provide an opportunity to increase exposure to good companies. Certainly, sharp corrections are accompanied by crisis and fear. But as the saying goes, ‘Never let a good crisis go to waste.” The widespread fear creates opportunities for investors. When people are afraid, their actions are based primarily on emotions rather than logic. People become extremely risk averse, panicking and selling their assets to the point where prices fully encompass the risks. In fact, panic even includes those risks that are very unlikely to occur. The most profitable opportunities to increase investment occur during such recessions, when all the negative sides are included in the price.

I can’t find the exact bottom

Extreme market movements are the result of herd behavior. It is difficult to fundamentally measure the exact top and bottom of the market. Therefore, it is futile to try to determine the exact point at which the market peaks or falls. Investors must accept and manage the risk that markets may fall even after purchasing securities at attractive prices. An intelligent investor must be an intelligent risk taker. In the financial markets one cannot demand absolute certainty about anything; you have to learn to deal with probabilities. History has shown that after a sharp decline such as we are experiencing now, the chance of a good return on investments increases. Yes, even if you make the right investments, the market may not reward you immediately. In the long run, however, markets are a weighing machine and prices move toward intrinsic values.

Need optimism and patience

To be a good investor requires a touch of optimism. When investing in good companies, one must be positive about the future and believe in a better future. Many companies in India have a strong business model, a good management team, healthy cash flows and a long path to profitable growth. A diversified portfolio of these companies will be much more valuable in the future and create wealth for shareholders. To realize these returns, the investor will also need patience. Patience is the crucial difference between an investor and a speculator. Have a long-term investment horizon, but without very short-term judgments. Frequent portfolio reviews lead to short-sighted loss aversion and act as a psychological barrier to investing.

I’ll end with a great quote from Warren Buffett: “To make money in stocks, you need the vision to see them, the courage to buy them, and the patience to hold them.”

(The author is CIO – Bajaj Finserv AMC)

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times)