Profit from the fear of others when markets slide

When global stock markets fall, as they have done in recent months, you might well wonder what Warren Buffett is doing. He is, after all, the world’s most famous living investor. Now approaching his 92nd birthday, he’s also experienced far more crashes corrections and bear markets than most of us.

One thing for certain that the chairman and CEO of Berkshire Hathaway won’t be doing is panicking - and nor will he be selling. “Benign neglect, bordering on sloth,” he once wrote, “remains the hallmark of our investment process.”

If anything, Buffett may well be taking the opportunity to buy stocks cheaper than he could have done before the downturn began. In his letter to Berkshire Hathaway shareholders in 1986, he famously urged investors: “Be fearful when others are greedy, and greedy when others are fearful.”

Buffett knows better than anyone how stock markets can mess with our brains.

When markets soar, the reflexive nucleus accumbens fires up at the back of the brain’s frontal lobe, and we instinctively want to buy. When markets fall, the amygdala floods our bloodstream with corticosterone, fear kicks in, and we’re overwhelmed by the urge to sell.

But piling into the market once prices have already risen, or rushing for the exit once they’ve fallen, is usually a bad idea. Human beings, in other words, are hard-wired to make poor investment decisions. The rational thing to do is to stick to the same strategy regardless of the market environment.

Tune out the noise

Of course, it’s simple advice, but not always easy to follow. Like now, for example. The most popular US stock index, the S&P 500, this year suffered its worst first half since 1970, falling more than 20%. And market volatility around the world has shown little sign of abating.

The first thing to do if you’re feeling anxious is to remove yourself from sources of stress. Believe me, reading the financial pages or watching a channel like Bloomberg is not going to make you feel any better. So try to switch off from the market noise.

Secondly, avoid doing anything you may come to regret. Try talking through your concerns with a trusted friend or, better still, your financial adviser. And if you don’t yet have an adviser, now might be a good time to consider hiring one.

If you’re still feeling worried, why not look at things from Warren Buffett’s point of view and try to use other people’s fear to your advantage?

Profit from others’ fear

Remember: stock prices reflect the very latest information and market sentiment. And, let’s face it, the news of late has been pretty bad: the continuing war in Ukraine, for example, concerns over fuel shortages, rising prices and hikes in interest rates. Right now, risks to the economy, and to equity prices, are all around. No wonder investors are fearful.

But risk works both ways. Nobody knows what the future holds. True, the bear market may still have some way to run. But, by the same token, the news could actually improve. If and when it eventually does, stock prices will start rising. Who knows? In a few years’ time, we may even look back at the summer of 2022 and see it as a buying opportunity.

Think about it: stocks are significantly cheaper now than they were at the start of the year. In other words, they’re “on sale”. You wouldn’t expect a stampede for the exits when everything goes on sale in a department store. Why should stock markets be any different?

The investment author and blogger Jonathan Clements hit the nail on the head the other day when he wrote: “I take no pleasure in seeing my portfolio shrink, but I love buying stock index funds at discount prices.”

Don’t stop buying!

The best advice for investors now, as always after steep market falls, is just to keep calm and carry on. Don’t be tempted to tinker with your portfolio — and certainly don’t stop drip-feeding money into stocks on a regular basis.

Of course, you need to keep a rein on your outgoings when the price of goods and services is rising. But, if you can afford to, why not commit to putting more money away each month towards your retirement?

In the long run, the financial markets have always rewarded disciplined investors with balanced, globally diversified portfolios who keep on buying when others are selling. There’s no reason to believe they won’t continue to do so in future.

Robin Powell is a journalist, author and editor of The Evidence-Based Investor.