When there is a correction or we enter bear market territory, people usually tend to hold steady on stocks they believe to still hold value. When there comes a crash, like the two instances above, it tends to cause global panic. Unfortunately for them, when people panic, people sell.
I noted it in my article on Stocktrades about a potential stock market crash, and I’ll note it here again. A little quote by Warren Buffett, arguably one of the most famous investing quotes of all time, should drive the point home.
“Be fearful when others are greedy. Be greedy when others are fearful”
I’m going to let you do the research yourself, think of it like a little homework experiment. Pick a few stocks you feel were highly valuable prior to the Dot Com Bubble and the American housing crisis. Then, watch them plummet while the chaos is going on.
Now, after the dust seems to have settled, see how long they take to recover. I’ll give you a little hint on what industry to look at; Canadian bank stocks. Particularly the big 5. Canadian banking stocks are highly regulated, and are about as bullet proof of an industry as you can get.
During the crisis of 2008, most of these stocks lost nearly half their value. What did smart investors do? Bought them up like they were the next best thing. Within two years some of these stocks had recovered to their pre-crash cost. Some had even appreciated beyond it.
The price of a stock doesn’t determine the value of a company
To sum all of this up in a few words, I could simply say these 4. Don’t worry about it. Invest your money. Pick profitable companies and watch your capital grow. When(not if) we hit the next correction, bear market or crash, simply re evaluate your stocks.
If they are still profitable, if the fundamentals haven’t changed and the company is still chugging along, don’t do like most and sell in a panic. Dollar cost average your way to a ridiculously good share price, collect the dividends and secretly laugh at those that exited the market.
This article has been republished with permission from Modest Money.