Are stock prices coming down but do we know what we are doing?

There has been talk about how a stock market crash is much overdue for some time now.

What do I think?

Well, I can tell you that the stock market will crash sometime in the future.

What I cannot tell you is when it would exactly happen.

Brilliant, isn't it?

Cannot go wrong with saying something like this.






I always say that we cannot predict when Mr. Market might go into a depression but we can most certainly prepare for it.

Think war chest.

Always have some money put aside in case opportunity knocks.

We don't have to be in a hurry to put all our money to work.

If there is nothing worth investing in, just sit on cash.

I certainly do not have any trouble sitting on cash and collecting dividends.

In fact, I rather like it.

See:
Revisiting AK's strategy with Charlie Munger.






1. If we own stocks of good businesses that are able to generate meaningful income for us

and

2. if we did not use borrowed funds or use funds which we might need for other purposes to do so,

why do we have to worry about stock prices going down?

In fact, we should be happy because we would be able to buy more stocks and have a larger share of these businesses if prices go down.

As investors, we really don't have to look at prices every single day.

If we are speculators, that is a different thing.







So, if we find ourselves worrying about price movements, ask ourselves if we are investors or speculators?

It is a world of difference.

People do frequently get so confused.

The worst thing that can happen, in my opinion, is when speculators think that they are investors.

There is nothing wrong with speculating but we have to know that we are speculating.

Don't know what I mean?

For example, see:
Investing or speculating in real estate?






Now, what about being an investor or a trader?

Well, we can do both.

We can have some trading positions and some investments at the same time.

Indeed, I can be investing in a stock and trading it at the same time.

Remember trading around a core position?

See:
Trading around a core position.

So, should we worry about stock prices coming down?

Well, we should really be asking if we know what we are doing?

"If you worry about corrections, you shouldn't own stocks." Warren Buffett

Watch the video:






Related posts:
1. Ready to come out on top? Part 1.
2. Ready to come out on top? Part 2.
3. Lost life savings and now in debt.
4. My final word on Bitcoin.

How to make recovering from investment losses easier?

Although we might feel quite clever or even smug from time to time, it is good to remind ourselves that we are not infallible and that we make mistakes.

In the same vein, it is quite impossible to make money in all our investments. Sometimes, we lose money. It is only natural. 





Of course, I always say that if we know our motivations for being invested, we will know what to do when thrown into any situation.

However, what if we were to suffer massive losses? 

Is the decision making process going to be any different?

Well, from a principled perspective, it shouldn't be any different. 

If an investment is no longer the investment it was, if it no longer fits our motivation for being invested, then, it should be removed from our portfolio. 

For many, this might be hard to do.

Avoid investing with borrowed funds.

I am assuming that no one likes a hard time. Normally, anyway. It could mean lots of stress, depression and sleepless nights. 

So, how do we avoid situations like this?

This might not be new to regular readers but if I were to distil what I have to say to just two points, they would be:

1. Do not invest more money than what we can afford to lose.

2. Recovery is made easier when we have a war chest ready.




Yes, AK sounds like a broken recorder but when the same things keep popping up, they are probably very important in one way or another and deserve some repeat mention.

Now, some might remember my experience with China Minzhong. 

I was convinced it made a good investment. 

The outcome was a good one but what if things had gone bad instead?

I said, "it might come as a surprise that I am not too affected by the possibility of a total loss if all allegations by Glaucus Research were proven true in due course...

"However, for people who have invested much more than they should have in China Minzhong, this could be a tall order. This is why I have said time and time again that we should always only invest with money we can afford to lose and not more."




For anyone who might not know what I am talking about or who might be interested in the blog post, here is the link: 

China Minzhong: What could happen and what to do?

In a reply to a reader and guest blogger then, I said,

"It is fortunate that I limited my exposure to S-chips to no more than 10% of my portfolio. It is unfortunate the exposure to S-chips at this point in time is in a single stock."

So, what was the worst case scenario then? 

10% of my investment portfolio could have gone down the toilet. 

Painful? Yes. 

Catastrophic? Not really. 

I could probably recover the potential losses in a year, give or take a couple of months and this brings me to the next point.

Losing 10% of all our bananas?

Not investing more money than what we can comfortably lose in the worst case scenario makes it easier to have closure in case things go wrong. 

However, it is my experience that it is easier to have complete closure if we are able to make up for the losses through future gains.

"Remember, we do not have to be 100% invested all the time although it is easy to feel a bit left out or a bit regretful that we are not putting more of our money to work as stock prices climb higher. Now, it might not be a bad thing to have a war chest full of cash and not do anything with it."

See related post #1.




I have had my fair share, maybe more than my fair share, of bad investments in my life as an investor. 

What I have shared in this blog post, distilled really to just 2 points, will hopefully be useful to anyone who is realistic enough to accept that investments can turn bad and how closure does not have to be too hard a process.

Related posts:

1. Revisiting AK's simple strategy with Charlie Munger.

2. Achieving $1 million in retirement funds.
"... without any money put aside, there is no way we would be able to take advantage of opportunities to buy on the cheap! Indeed, we might not even have to wait for a bear market to buy bombed out stocks as mispricing by Mr. Market could happen anytime ... "

Extra cash for better control of your finances.

Last year, in July, I blogged about how a bank offered a solution for us to "get on top of our finances". 



Today, I received an offer from another bank to give us "better control" of our finances.

Look at the E.I.R. and this is in a low interest rate environment!

Using leverage to invest could be a good idea because when it works, gains are magnified. However, when things go wrong as they sometimes do, it could be very ugly.

Now, when people borrow to fund consumption, what do we make of it?

"traditional" problems – such as people living beyond their means and racking up debt on credit cards and auto loans – drive many bankruptcies. Source: CNBC

Debt driven consumption is definitely wealth destructive. Too much of it and it could destroy lives.

"Once you get into debt, it's hell to get out. Don't let credit card debt carry over. You can't get ahead paying 18 percent." Charlie Munger

ASSI offers the basics to better financial security in 4 simple steps in:

Wage slaves should be fearful! (note publication date).

Now, this is what I call "better control".

Related posts:
1. Get on top of your finances.
2. Two questions which will help us build wealth.
3. The secret to avoiding financial ruin.
4. Mature and sophisticated consumers lease cars!
5. First time car buyer? Get a Mercedes Benz!
6. Cooling measures for cars spurned.