Short term nerves trump long term wisdom

August 2019

Investors have a bad habit of doing the wrong thing in the wake of sharemarket lurches such as the one we are experiencing, basing their reaction on gut instinct rather than logic.

Newspapers will blare “billions wiped off markets” and nervous investors will obey their overriding nervous sentiment and sell. “Australian shares lose $57 billion” came up on ABC news and that will be one of many such lines.

“Bloodbath for sharemarkets” was another.

While it’s understandable, a sudden decision to sell is the opposite of how experienced investors like Warren Buffett tend to act when markets go down.

Because he’s always got a well researched list of the stocks he wants to buy, or in most cases buy more of, he’ll just add to his company Berkshire Hathaway’s holdings. He is happy to call himself a value investor so he’ll be buying into what might well be an avalanche of selling, and more or less choosing his price.

That’s not always easy for the rest of us mere mortals. Another common saying is that it’s hard to catch a falling knife, which is a way of looking at markets that are dropping.

Where will they bottom out? You’ll never know in advance. To use another old phrase, no one ever rings a bell.

The biggest Australian losers in the 2008 Global Financial Crisis were the retail investors who shouted “sell” while markets were wobbly and greatly favoured buyers over sellers, and then subsequently sat on their hands as markets slowly recovered.


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Written by Andrew Main, brought to you by eInvest .
Please note that this article shares the views of the writer, Andrew Main, and not necessarily the views of eInvest. This article does not take into account your investment objectives, particular needs or financial situation. As always, seek advice and read the PDS.
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