I
know… Seeing your stock portfolio lose value is no fun. No fun at all. Who said
there is anything to love about that? But one day it will happen. Yes, believe
it or not, there will be another correction (defined as prices decreasing at
least 10%) and another bear market (defined as prices going down at least 20%).
But
a meltdown can be great news in many ways.
First,
a stock market correction or a bear market bring valuation down and create true
buy opportunities. Biogen (BIIB) lost more than 20% of its value on Friday,
July 24. Chairman and director Stelios Papadpoulos, purchased 10,000 shares at
an average price of $304.88 the following Monday. The Biogen big shot is also the Chairman of the Board of Directors of
Exelixis, Inc. and Regulus Therapeutics, Inc., a member of the Board of
Directors of BG Medicine, Inc. and the co-founder of Anadys Pharmaceuticals, Inc.,
which Hoffman-La Roche acquired in 2011. He retired as Vice Chairman of Cowen
& Co., LLC, a financial services company, in 2006, after six years with the
firm where, as an investment banker, he focused on the biotechnology and
pharmaceutical sectors. (Source: www.biogen.com) The point is that he likely knows a good
biotech investment when he sees one. Prices go down dramatically? If the asset
has value, buy; don’t sell! As Warren Buffett put it, "I will tell you how
to become rich. Close the doors. Be fearful when others are greedy. Be greedy
when others are fearful."
Second,
a correction or a bear market will test your mettle, and that’s a very good
thing! Are you a real investor or just a trader or speculator? Think about it
this way. The shares of Amazon (AMZN) and Netflix (NFLX) have gone through
tremendous ups and downs over the years. Yet despite the huge fluctuations, all
that you had to do is stay invested in their shares and you’d have created huge
wealth for yourself. In 17+ years, one dollar invested in AMZN would have
accrued well in excess of 300. But the shares did lose more than 90% of their
value after the tech bubble imploded. To quote Warren Buffett again, “If you aren't willing to own
a stock for ten years, don't even think about owning it for ten minutes. Put
together a portfolio of companies whose aggregate earnings march upward over
the years, and so also will the portfolio's market value.” It takes tremendous
resolve and discipline, not to mention nerves of steel, to hold on to these
shares, but if you do you’ll be rewarded. Do you have the b@lls, may we dare
ask? LinkedIn (LNKD) recently collapsed. Did you sell or buy LNKD that day or
shortly thereafter? Alibaba (BABA) is languishing after its IPO. Are you buying
or selling? There is real satisfaction in showing courage and staying the
course. Congratulations! You are getting rich. Just fasten your seatbelt!
Third,
Investors should be aware that a market can’t keep going up forever; it needs
to take breathers. If stocks keep rising, they may reach bubble territory. Once
we’re in a bubble, the way down can be quite traumatic. The following bear
market and reversion to the mean then have an end-of-the-world feel to
them. Crashes and crises can trigger
recessions in their own right, disrupt economies and destabilize societies. Think
1929… Stocks go down? Enjoy! A healthy pullback is to be expected on the way to
stardom and fortune. Even the implosion of bubbles eventually regenerates
societies, economies and the process of wealth creation and (re)distribution.
So be it.
Fourth,
in the rare case you have invested in a losing stock (does it ever happen I
wonder?), well selling it at a loss will reduce your taxable capital gains for
the year and you won’t owe Uncle Sam and the IRS quite as much. Lucky you!
Fifth
and lastly, experiencing firsthand the ferociousness of bear markets will try you, educate
you and “better” you. As Mark Twain put
it, “A man who carries a cat by the tail learns something he can learn in no
other way.” Corrections and bear markets produce, not
only attractive valuations, but also the next generation of great investors.
The Great Depression had Benjamin Graham, Warren Buffett and Sir
John Templeton. Will the next one have you?
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