What will you do [when] the market goes down 20% in [insert timeframe]?

I’ve often written to you saying that predicting the market’s level a quarter or year from now is impossible, but that doesn’t mean that we cannot make some predictions about its course of action over longer periods.

Over the past 100 years or so, the S&P500 declined by more than 10% (a “correction”) roughly once a year, and by more than 20% (a “bear market”) once every 3.5 years, on average, with wide variability in periods. Corrections have lasted an average of 10 months and bear markets have averaged 15 months in length.

While the timing of the next correction or bear market is impossible to predict, I feel it’s safe to say that we will have many of them in the future. Accepting the inevitability of corrections and bear markets is a necessary condition for all stock market investors. If one cannot handle a temporary 20% or 30% decline in the value of their portfolio, they should not be invested in the stock market because those kinds of declines are guaranteed to happen from time to time.

It is very important for every investor to know how they will react when that happens. During bear markets, many investors effectively shoot themselves in the foot and sell at the worse time possible when buying is what they should be doing.

Buying when it seems like the sky is falling is not easy, but why should it be? Successful investing shouldn’t be easy. If it were, everyone would do it and it would cease to be!

History also tells us that trying to time the market is a fool’s errand and many investors who sell their portfolios prematurely end up buying them back at higher prices. So what should one do, you may ask? I think the best thing you can do is mentally prepare for the drops by thinking through the scenario and asking yourself what you would do when it happens. Do you have cash sitting somewhere that you can use to buy more? What would you buy? The more often and more specific you run the scenario in your head, the better equipped you will be when it ultimately happens.

Value investors are natural bargain hunters. We get a high from finding good deals. We look forward to seasonal sales at the local department store. We love the outlet mall. And we get excited when markets drop. We always run scenarios in our head of what, where, and how much we would buy. We don’t know when the next 20% drop will happen, but we will be ready to go shopping.


PS. The Nordstrom Anniversary Sale starts July 21st. Bargains abound, so please spend liberally. Prices go up again August 7th. Wouldn’t it be great if Mr. Market also told us when prices will go down and when they will go up again?


First published in Mayar Fund’s Letter to Partners – June 2017 (portions have been redacted)



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