There’s an old motivational story I’m sure some of you have heard before about the two salesmen. For those who haven’t; the story goes that two shoe salesmen are sent to a foreign country to research the market opportunity. After a few days, one salesman contacts his boss and says, “This was a waste of time. No one here wears shoes”. The other salesman contacts his boss and says, “Send as much inventory as you can spare. No one here wears shoes”.
I’ve always liked that analogy. From an enterprising standpoint, it’s a pretty good breakdown of what’s now known as “Blue Ocean Strategy” – seeking out opportunities in untapped markets rather than trying to compete with big players.
Ten years ago, Playstation and Xbox were duking it out to see who could make the winning console, with the best graphics and processing power. Nintendo recognized this, and instead made a family-friendly console that focussed on more intuitive controls. The Nintendo Wii greatly outsold its rivals. This is a great example of “Blue Ocean Strategy”.
From an investing point of view (particularly in times like this), it’s a great lesson in stock market perspective.
With that said, it would be ridiculous of me tell people to look on the bright side of the market volatility we’re currently seeing. That’s not going to help anything. However, if you change your behaviour, you can actually force yourself to embrace downturns like this.
It’s great to have a nice lump sum to invest with. It’s when we find ourselves with a surplus of spare cash that most of us start exploring the idea in the first place. It’s also the situation that leads to the worst behaviour and gets new investors in trouble.
Typically new investors see this lump sum as the money that’s going to secure their future. With that in mind, it is rushed into the stock market as fast as possible. They don’t spend any time reading about investing or properly researching the companies they are interested in. They buy the stocks, not the underlying businesses. With all that money in the market, the new investor checks his brokerage account every day and get anxious anytime he sees red.
According to behavioural psychologist Daniel Kahneman, we know that the pain of loss is almost three times as powerful as the pleasure of gain. This is referred to as loss aversion. So checking your brokerage account every day is going to cause nothing but agony to investors. Even if your portfolio goes up two out of every three days (as is the average), you’ll still not be happy.
Then a market downturn happens and it feels like the world is falling apart. All that money that was supposed to lead to the good life is disappearing before their eyes. To the investor this is Black Monday – what they’ve always feared.
Investing is something you should grow into, not jump into.
With that in mind, starting small is usually the better approach. An investor who starts small doesn’t need a big lump sum. All that’s required is a commitment to start investing some income over the long term. This will greatly change your perspective when it comes to the stock market in general.
These investors decide one day that they want to start planning for their future by getting their personal finances in order. They begin by spending a little less money every month. This is a life changing decision that is going to positively impact them for decades if they stick to it. Already they’ve made a more positive move than the person who simply threw a lot of money into the market.
Next they start reading up on investing and the stock market. They buy books from the masters of the craft like Peter Lynch, Jack Bogle and Joel Greenblatt. Each of these guys has a different approach, so there’s plenty of choice on what philosophy to follow.
They look into some of the companies that they like and whose products they buy regularly. They read articles about these companies and research the CEO to see if they have a good track history. The ones that inspire confidence in them make it onto a watchlist, the ones that don’t get discarded.
Meanwhile more money is building up in that savings account. They contact their bank and arrange that 10% of their paycheck be transferred directly into a brokerage account every month.
Finally they decide to start investing by buying a small amount of shares in a big bedrock company like Apple or Disney. The next month, they diversify by buying some shares in a different sector. As the months pass, they continue to invest and build up a nice portfolio of stocks. They don’t check their account every day, they don’t feel anxiety every time the market goes down.
When the same downturn happens, they don’t panic. Of course this isn’t the end of the world. Those investment books they read explained how these things happen all the time. In fact, they were right about to buy more stocks with their monthly savings, and now they just got cheaper. This isn’t Black Monday…it’s Black Friday.