We all know what a bull and a bear market are. For most of us, we only love bull markets and hates bear markets. But an intelligent investor loves the bear markets as much as he loves the bull market. When there is a bear market, the share price of companies is falling rapidly. Most people see this as a catastrophe. So, think like this for a moment: Suppose you have a good company having good cashflows and the company is constantly generating profits and is also continuously growing. You were going to buy this company at say $10/share. But then, out of nowhere came a crash and the share price of this company fell to $5/share. What would you do?
You have two choices:
1. Follow the ideology of a trader and do not buy because the market is falling.
2. Be an intelligent investor and buy even more shares of that company than you would buy before the crash because nothing has changed in the company. What has changed is the numbers on the computer. Only the share price has changed. That does not mean that the company is failing. It is only that the people’s pessimism overtook them and they are giving a bargain to you. If you can play very well, you can create enormous wealth if you follow what Benjamin Graham said and if you are an intelligent investor.
Let us discuss why you should buy more shares when the share price is falling than when the share price is going up. You have found a very good company and the profit, book value, returns, etc. are all good. And when the share price is falling, you are getting a good deal. Nothing has changed – the profits, returns, book value, etc. Yet, you are getting the shares at a discount. Why won’t you buy it at discount? Let’s say for example, from your own analysis, you expect the share price of that company to be $20. If you buy it at $10 and the price goes down to $5 and it again goes up to $20. Well, that’s a gain of 100%. Your invested money would be doubled. But if you buy it at $5 and the share price goes up to $20, that’s a gain of over 300%. Your invested money would quadruped. That is why the famous investors always treat the stock market crash as his old friend and make a nice deal out of him. You shouldn’t hate crashes, instead, you should embrace them and use them to compound your wealth. You should learn to make deal with the market.
So, whenever a stock market crash comes, keep some cash (about 10% of your portfolio) and buy shares of companies that you know are good and have the potential to grow, when their share price falling. Always remember, you are getting it at a discount.
Now, what about booms? When there is a stock market boom, the stock prices never seem to be expensive although they are at an all-time high. Common people and those who are not intelligent investors will think this is the right time to invest and keep investing more and more money making the market dangerously high. But before you invest more and more money during a boom, always remember that a boom is sure to be followed by a crash that will destroy virtually all the wealth you have created during the boom. So, the best thing is to invest less money during booms. And one important note: Here I don’t mean you shouldn’t invest during a boom; you should invest it but the money you invest should be a little less than you normally invest. You could invest all of your money if the company you are investing in is really cheap and you think you are really getting it at a discount than its intrinsic value. I mean, if there is no boom, how would an investor get rich?
When there is a boom, always look out for companies that are not in people’s focus. When most of the people are in focus on certain industries they miss out on really good old companies. During the 1990s boom, when internet companies are the prime focus of everyone, there were some companies whose earnings are more than what the company is worth. This is because the companies do not have anything to do with the internet and they think it’s quite ancient. So, it lacks people’s attention so their prices are really cheap as the share prices of internet companies have skyrocketed while this good company goes unnoticed. But, during crashes, these companies sky rocked as if there is no limit for them even the sky is no barrier for them. So, during booms, search out these companies. It’s really nice to have one in our portfolio. Right now, people are interested in companies for the future like AI, ML, electric cars, space travel, etc. During this, people usually miss out on companies whose businesses are relatively simple and certainly not of the future but generates high profit. So, search out this type of company. I mean, the prime focus of investing is to grow our money. We don’t care whether the company is for the future or ancient. What we care about is the profit it generates, how much cash it can generate for us and how long is it going to continue generating profit for us. Always remember this when you are buying any stock.
Knowledge Glutton 