Learn to love a falling market

Financial markets have given investors a hard time over the past few months. Not only have we seen a drop in prices, but the volatility and multi-percentage-point days seem to be making investors a little seasick. The first thing people uneasy want to do is get off the boat .

This is precisely the wrong thing to do, and here’s why. Thinking that fluctuation is bad for investors is a mistaken perspective. Volatility is the stock market’s way of redistributing shares of large companies to their rightful long-term owners. When the markets fluctuate as they have for the past few months, it is almost impossible to separate from the emotional powers of fear and greed.

Steve Booren

The price per share doesn’t matter unless you’re buying or selling that day. Apart from some “entertainment value”, daily fluctuations should be ignored.

“What makes stocks valuable in the long run isn’t the market. It’s the profitability of the companies you own,” Peter Lynch said in Worth Magazine in 1995.

I agree with him. Over time, as companies increase in value, sooner or later their shares will sell for a higher price.

Our assertion is that you must remember that you own part of successful and profitable businesses. When we live in times like last December, when prices temporarily drop, investors tend to become anxious and fearful. If you’re a long-term investor who likes to own big dividend-paying companies, short-term volatility shouldn’t be relevant. If you don’t intend to sell investments for many years, why worry about prices today?

Short-term price declines worry many investors. This emotional heartburn is just one
which is why it makes sense to work with a professional who can help you stay on track.

Having been an asset manager for 40 years, I often feel like I’m living in what could be described as “investment manager hell”. When customers are excited, almost giddy with excitement about the markets and the economy, I tend to feel frustrated. Times like these usually mean my favorite companies are overvalued.

On the other hand, when customers express frustration, anger, fear, or anxiety about the markets, I tend to get upset. This usually means my favorite businesses are on sale. Remember that lower prices mean better deals. Sometimes the price drops so far, and so hard, that it is possible to acquire shares at bargain prices. Panic can be a costly emotion for salespeople.

Rather than getting caught up in the moment, we look to the future and to the investment opportunities that may develop. It’s investment manager hell – loving ‘bad’ markets and hating ‘good’ markets. When you work diligently to understand each of the companies that you can own as an investor, you realize that the value of the company is the sum of the future cash flows that a company can generate. The higher the current stock price, the more that investment may be overvalued. Likewise, the lower the price today, the more undervalued that company.

This may be the perfect time to increase ownership shares. When prices temporarily drop, rather than being afraid, recognize that you can buy shares of the company at lower prices. Try to get into the habit of never reacting to prices alone. A more thorough and thoughtful approach is needed to assess a company’s performance. Price should not be the only indicator.

How you think about market fluctuations and, more importantly, what you do about it takes discipline. Often, investors let fear and greed trump common sense or wisdom. Don’t be a victim of the market. Remember that the best time to buy is when items are on sale. Investments are no different. Good investments, like good products or services, sometimes offer discounts.

When they arrive, buy them, keep them for a long time and see how that investment can pay off.

So as you wind down 2018, I encourage you to look beyond the value of your portfolio. Try going back to page two or three of your statement and find the income line. Did your income improve in 2018? Did it stay the same? Did he come down? Hopefully your income increases, and at a rate above inflation. Over a long period, this will lead to more choices, more opportunities and greater freedom.

Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. Opinions are given for general information and are not intended to be specific advice or recommendations.