Are You Worried About The Stock Market’s Slide? Here’s Something To Help

Investors in Singapore are likely to be familiar with bears. Bears? Well, I’m talking about a bear market, which is widely taken to be a situation in which stocks have fallen by at least 20% from a recent high.

With the Straits Times Index (SGX: ^STI) sitting at 2,593 points currently, Singapore’s market bellwether is 27% lower than an April 2015 high and thus firmly entrenched in bear territory. In such times, which can understandably cause one to be worried, what’s an investor to do?

Firstly, we have to realise and accept that short-term market declines are common. It does not mean that anything is broken; it’s just what stocks do. From 1993 to 2014, a period which saw the Straits Times Index more than double, the index had suffered maximum peak-to-trough losses of 20% or more in a calendar year in nine of those years.

The late economist Hyman Minsky has a great theory that I think may help shed light on why stocks are bound to crash from time to time. Minsky’s idea, which is used more to explain economic cycles, is that stability is inherently destabilizing. Here’s my colleague Morgan Housel linking this to investing in the stock market:

“Whether it’s stocks not crashing or the economy going a long time without a recessions, stability makes people feel safe. And when people feel safe, they take more risk, like going into debt or buying more stocks.

It pretty much has to be this way. If there was no volatility, and we knew stocks went up 8% every year [the long-run average annual return for the U.S. stock market], the only rational response would be to pay more for them, until they were expensive enough to return less than 8%.

It would be crazy for this not to happen, because no rational person would hold cash in the bank if they were guaranteed a higher return in stocks. If we had a 100% guarantee that stocks would return 8% a year, people would bid prices up until they returned the same amount as FDIC-insured savings accounts, which is about 0%.

But there are no guarantees — only the perception of guarantees. Bad stuff happens, and when stocks are priced for perfection, a mere sniff of bad news will send them plunging.”

Secondly, as investors, we have to keep the faith that tomorrow will be a brighter day. The legendary investor Peter Lynch had written the following in his 1993 investing book, Beating The Street:

“Keeping the faith and stock picking are normally not discussed in the same paragraph, but success in the latter depends on the former [emphasis mine]. You can be the world’s greatest expert on balance sheets or p/e ratios, but without faith, you’ll tend to believe the negative headlines…

…What sort of faith am I talking about?

Faith that America will survive, that people will continue to get up in the morning and put their pants on one leg at a time, and that the corporations that make the pants will turn a profit for the shareholders.

Faith that as old enterprises lose momentum and disappear, exciting new ones such as Wal-Mart, Federal Express, and Apple Computer will emerge to take their place.

Faith that America is a nation of hardworking and inventive people, and that even yuppies have gotten a bad rap for being lazy.”

Lynch was referring to the U.S. in the above, but the central thrust is the importance of having an optimistic attitude toward life that things will get better eventually. I think that is something which is universally applicable for investors everywhere.

Financial journalist Jason Zweig is the editor of the revised edition of The Intelligent Investor, the classic investing text from the great Benjamin Graham. In the book, Zweig wrote the following, which eloquently echoes Lynch’s thoughts:

“And today’s headlines are full of fearful facts and unresolved risks: the death of the 1990s bull market, sluggish economic growth, corporate fraud, the spectres of terrorism and war. “Investors don’t like uncertainty,” a market strategist is intoning right now on financial TV or in today’s newspaper.

But investors have never liked uncertainty – and yet it is the most fundamental and enduring condition of the investing world…

…It always has been, and it always will be. At heart, “uncertainty” and “investing” are synonyms. In the real world, no one has ever been given the ability to see that any particular time is the best time to buy stocks. Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow [emphasis mine].

Singapore’s economy and stock market have endured horrible times and came away on top, albeit with battle-scars and all. There are no guarantees for the future, but it has paid to be a rational optimist in the past. Let’s keep the faith here, my fellow Fools!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Apple.