So I am not going to tell you what happen. If you are here, then you are already a savvy investor and should have known what happened. If not, then this time-sensitive article is not for you.
And I tell you this, what paper losses you and I may suffer in our investment portfolio is nothing compared to the below.
Monday’s steep drop in China hit the portfolios of the world’s richest people hard. It spread to the West’s wealthiest, too. Microsoft founder Bill Gates lost $3.2 billion, and Amazon CEO Jeff Bezos saw $2.6 billion wiped from his wealth. Investor Warren Buffett lost $2.6 billion, and co-founder of Facebook Mark Zuckerberg suffered $1.7 billion-dollar loss from his accounts.
These business owners don’t dump their stocks. If you have a similar mindset investing in a company stocks, do you dump the stocks when there is nothing fundamentally wrong with the company?
I am not here to preach what you, as a savvy investor, already knew. But ponder of the points below made by Warren Buffett as reminder in times of market volatility.
1) Treat stocks as a gamble
It should not be seen as such unlike what our mothers tell us. But hear this when Buffett said – “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Just like gambling, don’t bet (on the stock market) what you can’t lose.
LCF note: Don’t invest an amount you need to use immediately or in short term (whether stocks or unit trust or property). Keep them in FDs.
Likewise, if you are saving for a house, a car, or anything else that requires cash soon, don’t keep that money in any stock or stock fund. That’s true when stocks are soaring or falling, because you never know when a tough period will hit. On average, the stock market falls 20 percent or more every five years and then recovers. So the rule of thumb: Put no money in the stock market that you will need within three to five years.
Similarly, apply the 5 years rule of thumb to children education fund.
Anything you will need to pay for college during the next five years should not be in stocks, stock mutual funds or stock exchange-traded funds. When a child starts college, there’s nothing in the stock market. When the child is a year away from starting college, only 25 percent is in the market. When the child is two years from starting, no more than 50 percent is in the stock market.
2) Wealth is skin deep, bling has nothing to do with long term wealth
“Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.”
Granted, if you take Buffet’s advice, you’re getting tips from someone who *could* ride in a Rolls Royce, but chose not to. Still, wealth doesn’t necessarily equate to how well you know the market (and by far, most truly wealthy people don’t splurge on items like overpriced cars).
If you want market advice, take a look at the person’s mindset and investing principles, not the car they drive
LCF note: Investing is not like a higher IQ person beats the lower IQ guy. And we will soon realize even the amount of work done doesn’t really positively correlate to higher ROI in the short term. So if we have short term horizon, better don’t invest and put in FDs.
3) Alternate between greedy and fearful at the right time
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
One of the simplest rules of investing is to buy low and sell high–so why is that so difficult? Fear. When the market starts to crash or look a bit shaky, people start to panic. And panicked people do stupid things.
LCF note: Putting my money where my mouth is, I started go bargain shopping this week. Capital gain aside, this REIT counter gives no brainer 8+% annually at its current price. Want to know and learn how to invest in MREITs? Go into REITMethod.com waiting list.
4) Mr Market vs. Everything Else
The economy and just about everything else doesn’t have as much to do with the stocks market as people think. Don’t assume the two are intertwined bed buddies at every turn. The economy can be used as one of many tools to predict market trends, but it’s not a crystal ball.
5) Derivative deployed as deadly weapons
“Derivatives are financial weapons of mass destruction.” In other words, use them (or not!) wisely.
LCF note: Many don’t know this, but I used high risk Put options to recover my losses in the now obsolete RIMM (Research in Motion) stocks back in 2011. Read the details in my old article – Leveraged investing using Put option
6) Know when to cut loss
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
” You don’t want to sell solely out of fear, but you don’t want to hold stubbornly on to a losing investment, either. Acknowledge mistakes, accept failure/losses and move on. Reduce mistakes by due diligence, coupled with good timing.
LCF note: We are mortals after all. Even Warren Buffett made mistakes investing in Tesco PLC – a $ 444 mil mistakes (Source: CNBC)