Nobody knows when a stock (or stock market) has bottomed. People can speculate — and every analyst hoping for a bit of TV fame certainly will — but no one, no matter how many previous predictions they claim to get right, knows when a stock or market has bottomed. We’ll go.
And while it’s tempting as an investor to wait for better prices, this is a dangerous game. Yes, you may get a better price by waiting, but you may also find yourself waiting too long and missing an opportunity.
Bear markets, bear markets, market crashes – whatever you want to call it doesn’t follow any rules. The market correction takes away the exaggerated companies that have declined in value while also driving down the stocks of the strong companies that have done well.
As a long-term investor, your job (or at least the best path to wealth accumulation) doesn’t know where the bottom is. Instead, companies with a bright long-term future, where today’s price is hard, are categorized as companies that have seen their stock prices fall because they do not have sound business fundamentals.
It’s not always easy to tell when looking at some examples:
There are investors and analysts who feel both ways in any of the above questions. But the best thing about investing is that you just have to put your money into stocks where you have deep convictions.
What is a long term investor?
Long-term investors view bear markets as an opportunity to add to their portfolios. Before you even think about doing this, you need to think about what it means to be a long-term investor.
A long-term investor buys shares in companies he or she intends to hold for years—essentially forever. Typically, a long-term investor has an investment thesis — reason why — he wants to own the stock. This thesis should give the investor long-term confidence in this stock even when the company’s stock price falls.
Essentially, the long-term investor checks his holdings to make sure the company hasn’t made a change that would deviate from this thesis. For example, has the CEO changed and the new leader made a major change in how the company operates? Or, something huge happened in the market that led to you changing your view of the company’s prospects.
Long-term investors realize that many companies — Amazon is the best-known example — fail to deliver quarterly results, and instead, their leaders make the best decisions for the company to succeed over decades, not quarters. That’s why Amazon (to stand by the example) was willing to lose money as it invests in the infrastructure it needs for long-term success.
Go to follow
Moves like these could send the company’s stock price down, but it’s hard to argue that Amazon (and many other market leaders) are wrong in viewing their business as a long-term enterprise, rather than a quarterly exercise in releasing press releases.
How to get rich in a bear market?
Bear markets, bear markets, and stock market crashes have sold off good companies. If you have a company that you believe in (and you probably already own), you can buy shares with complete faith that you are making the right choice for your future, even if the bear market continues and the stock goes down.
Long-term means years, sometimes decades, and a fall in the stock price due to market or macroeconomic conditions allows you to buy shares and do what is known as dollar cost averaging. This is where instead of waiting for the best price, you can buy shares as the funds allow, at the average price you paid to own the shares in the company.
A bear market actually allows you to lower the average cost per share of your best holdings if the stock price drops below what you initially paid.
The challenge – and it’s the big challenge – is that long-term investing means that you own shares for a long (or very long) period. For now, this may mean that your portfolio has taken a hit, but if you believe in the company you own for the long-term, holding it and adding these positions makes sense.
And while I’m an advocate of long-term investing, I’m not alone in this because legendary investor Warren Buffett followed the same principles and made some famous quotes on the subject.
“Someone is sitting in the shade today because someone planted a tree a long time ago,” he said.
As the Omaha oracle regularly mentions two other things that illustrate this philosophy,
“If you’re not willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
“Our favorite retention period is forever.”
Should long-term investing be your only strategy? Of course not, you can also make money from being a more active trader. If you have more advice on long-term investing, check out TheStreet Smarts, a product designed to help you get started and build a long-term mindset. And if you want a more active approach alongside (or alone), the managed portfolio in TheStreet’s Action Alerts Plus gives you access to global portfolio managers Chris Versace and Bob Lang, so you can learn how to make money during these scary times.