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Legend has it that financier Baron Nathan Mayer Rothschild said more than two hundred years ago, “When there’s blood on the streets, it’s time to buy.” What did the very wealthy banker mean by that: The best buying opportunities in the stock markets come when prices are desperately down to the basement and no optimists, far and wide, believe stock prices will rise again.
Looking back, we see that drastic price corrections and bear markets are a recurring feature of financial markets. This was the case during the 1987 stock market crash on Black Monday, after the dotcom bubble burst in 2001, with the major financial crisis in 2008, and also with the stock market crash in 2020 when the corona epidemic broke out.
What all four events have in common is that prices are rising again. Anyone who has invested in the S&P 500 Index over a 20-year timeframe has always made a profit. During the 1987 stock market crash, it took 3.5 years for the S&P 500 Index to recover from losses. From its lowest level during the financial crisis, it took 5 years for the index to reach a new record high. The fastest recovery was during the corona epidemic, where S&P compensated for a 25 percent loss in 5 months.
More than it pays to sit outside the bear market
For joining these long-term opportunities, investment legend Warren Buffett, founder of Berkeshire Hathaway, recommends: “Be fearful when others are greedy and be greedy when others are afraid.” His philosophy: to buy the shares of a well-performing company when the market sells them in panic and make a profit when the whole world only believes in a constantly rising stock market.
However, quite a few investors do the opposite of what Buffett suggests. When prices drop or the stock market crashes, they panic and sell everything when prices nearly bottom out. Looking back, it’s not just the real losses that hurt. What is much more serious is that you often miss the right time to re-enter.
This results in underinvestment at the start of the uptrend. A study by the world’s largest asset manager Blackrock shows the potential for profits distributed by investors. If you missed the 25 best trading days of the last 30 years, you’ve wasted a lot of return potential. If you miss the 25 best days in the stock market of the last 30 years, your returns will be greatly reduced.
Losses are felt twice as strong
Anyone who has invested in the S&P 500 Index over the past 30 years has increased their portfolio value from $100,000 to $324,019 (+324%). However, those who missed the top ten trading days were only able to increase their value to $161,706 (+161.7%). Missing the top 25 trading days looks even worse. This brought the earnings down to $82,256 (+82.2%).
However, investing isn’t the only thing that can throw a wrench into things for investors. Another potential source of error is the so-called trend effect. In behavioral economics, the term describes the tendency of investors to sell stocks that have increased in value and to hold shares that have declined in value.
This is because, subjectively, investors lose about twice their earnings. Asymmetric risk aversion means that private and institutional investors tend to sell profitable positions too early and hold losses too long. That’s why it’s important to hold on to successful companies whose share prices tend to rise over the long term.
Warren Buffett: “Our preferred retention period is forever”
In the long run, stocks provide the greatest returns if kept in a portfolio for several decades. Successful investors Peter Lynch, Benjamin Graham, Jesse Livermore, and Warren Buffett have thrived by investing in solid companies during uncertain times or crises.
According to Buffett, successful investing takes time, discipline and patience. No matter the skill or effort, some things just take time. A glance at the value of their assets shows how much perseverance it takes to become truly rich.
The star investor acquired more than 90 percent of his $112 billion fortune only after he turned 65. Buffett is 92 today and his partner Charlie Munger is 99 years old.
Source :Blick
I’m Tim David and I work as an author for 24 Instant News, covering the Market section. With a Bachelor’s Degree in Journalism, my mission is to provide accurate, timely and insightful news coverage that helps our readers stay informed about the latest trends in the market. My writing style is focused on making complex economic topics easy to understand for everyone.
