Buy When There’s Blood in the Street

Market downturns, like the one caused by the Covid-19 pandemic, often result from a mix of factors including economic bubbles, panic selling, high interest rates, geopolitical issues, or unpredictable events. These declines can be exacerbated by aggressive traders who, facing margin calls, liquidate their holdings, further driving down the market.

However, such downturns can also present golden opportunities for astute investors. Lowered stock prices can offer a chance to invest in previously unaffordable stocks or funds, or to maintain a regular investment strategy. These periods can rapidly create wealth for those who have done their due diligence and have the capital to invest with confidence. But why do many investors miss out on these opportunities?

Often, we plan for future investment decisions – like buying bonds at higher yields or investing in stocks during a market crash – without considering our emotional state when the time comes. For these situations to arise, something usually happens that makes us hesitant to follow through on our plans. While it’s easy to set intentions for the future, acting on them in the moment can be challenging.

Two main reasons explain this behavior:

  • Overestimation of Our Future Self: We often view our future selves as more capable, disciplined, and unaffected by current troubles. This idealized version of ourselves is seen as ready to act when needed.
  • Unpredictability of Future Circumstances: While we anticipate future scenarios optimistically, unforeseen problems and changes in conditions can arise, altering our willingness to act according to our initial plans.

This second point is especially relevant to investors who talk about waiting for the “right moment” to invest. Such moments often come about due to negative developments that shift market sentiment. They are a reaction to bad news, and we will not be immune to this negativity.

Take the example of bonds: when inflation was low, and bonds were performing well, many hoped for higher yields without wanting other factors to change. The idea of buying low is attractive, but the reality of what must happen for prices to drop – and the difficulty of making investments during such times – is often overlooked.

To combat this tendency, I try and do two things:

  1. Plan for Context, Not Just Prices: Instead of basing decisions solely on prices or valuations, consider what might happen to cause these changes. Setting realistic expectations about the circumstances in which you’ll be making decisions is imperative to getting you to act when the time comes.
  2. Systematize Decisions: Implementing systematic approaches to investing, such as rebalancing, can help bridge the gap between our rational plans and our emotional responses in the moment. Of course, it is important to remember that in times of stress we will likely try to ‘override the model’ and stop such systematic decisions to feel in control, arguing that they don’t capture the gravity or nuance of the situation unfolding. In reality it will just be our emotions telling us not to do something inherently uncomfortable.

Despite our best intentions, the likelihood is that when better entry points or valuations appear, we will most likely hesitate or fail to act. The prevailing narratives will be negative, past performance dismal, and we’ll likely find reasons to avoid taking action.

In such challenging times, working with an investment manager can be invaluable. They offer expert guidance to help navigate difficult decisions and market conditions. Luthuli Capital provides such services, helping clients to futureproof their portfolios and prepare for profitable opportunities during market crashes.

For expert advice during difficult times, consider reaching out to Luthuli Capital for an investment consultation, and ensure your investments are poised to thrive in any market condition.

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