Adjust Text Size> #2 Are you a Victim or Are You a Opportunist? (February 2008)
How do you mentally process a bear market...as a victim or opportunist? Whatever you do, you can’t change a bear market, how long it lasts, or how long it will take to rebound. The only thing you can change is the way you experience the markets.
Nick Murray, author of Simple Wealth, Inevitable Wealth, wants to leave his readers with an appreciation of markets and a mindset for processing bear markets as an opportunist rather than as a victim.
An old Zen parable speaks of two monks who were watching a flapping pennant. One monk said, “The pennant is moving, but the wind is not moving.” The other monk said, “It is the wind that is moving, the pennant is not moving.” A third monk happened along, overheard the conversation, and said, “The pennant is not moving, the wind is not moving, your minds are moving.”
Says Murray, "I want you to take this as a parable that precisely describes bear markets.” What is happening in the market is infinitely less important than two things that affect how your mind is moving while you are watching a bear market.
First, how surprised are you? What the market does to people is never as critical as whether they are surprised by it. If a bear market has surprised you, you probably weren’t completely ready to deal with it. It’s best to have a psychological battle plan already in place for waiting out a bear market.
Second, what do you think is happening? It doesn't matter how hard the wind is blowing or how hard the pennant is flapping. What do you think is going on? If you think this is the end of the world, you’re going to panic and get out. If you think that “this time is different” - the four most dangerous words in investing – you’re going to panic and get out.
Murray suggests we learn, objectively and intellectually, all about bear markets. Start with the 12 bear markets that have occurred in this country since the end of World War II. Find out when they topped and bottomed out, the number of days in between each, and the percentage decline.
If you know the facts and know that bear markets are inevitable, you won’t get surprised, and that’s half the battle. The right mindset requires you to overcome all the media coverage portraying bear markets as the end of the world.
In fact, if you had invested $1,000 in the Standard & Poor’s Index on the first trading day of January of 1945 and then left it alone, you would have more than $1 million today. Almost effortlessly, you would have increased your equity by 1,000 times – even though the market plunged an average of 30 percent 12 times between 1945 and now and about a third of your capital disappeared, on average, each time.