For many of us investors (especially the newbies), right now is a psychologically painful period. A perfect storm of record-high inflation, Fed monetary tightening, and the Russia-Ukraine conflict (triggering an oil price jump) has triggered a significant drawdown in many of the US and China stocks in our portfolio.

March 2022 Stock Market: A Perfect Storm

Although the S&P 500 is only down 10% from its highs (after a low of 14.6% made last week), many of your portfolio stocks could be down 20% to 40% from their highs. This is a highly unusual short-term occurrence.

So, why is this the case?

If you look at the table below, you can see that these are precisely the sectors that are at the center of this current correction. They are the sectors that are going through the biggest corrections.

The only reason why the S&P 500 is not down much more is that it is being held up by the energy sector (boosted by rising commodity/oil prices), basic materials, and utilities. 

In the short term, there is no way to predict with certainty which asset class or sector will outperform and which ones will underperform. In the short term, any asset class like Bitcoin or energy could give spectacular returns. However, whether those returns are sustainable over the long run is a big uncertainty.

As an investor, we MUST base our decisions on long-term sustainable and predictable returns.

Training Yourself to Manage Temporary Pullbacks in the Market & Your Portfolio 

For those who are new, you may find this market correction psychologically challenging. Fear, doubt, frustration, anxiety could be playing with your mind now. 

It’s quite common for new investors to feel this way. 

Like taking your first plane ride, you may freak out when there is strong turbulence and think your plane will crash. 

After going through many more plane rides, you will be calming watching a movie and sipping on a martini. You know the turbulence won’t last and the plane will land safely (as long as you sat on a fundamental good plane with financially strong engines). 

I have said this many times. If you are holding fundamentally good businesses that have wide moats, are generating free cash flow, have strong balance sheets, and growing, you should have ZERO WORRIES! 

If you are feeling it psychologically challenging at this time, there are only 4 reasons!

Mental Trap #1: You Don’t Really Understand The Business Behind The Stock …. 

If you have not done enough research and truly understand the business fundamental performance behind the stock, it’s easy to freak out when prices fall. Instead of looking at the short-term ups and downs of the price or reading sensational news of writers with an agenda, read the financial statements and get to understand the business.

If you know that the business is profitable and growing, you should not be at all concerned about the temporary price being quoted by the markets. You either ignore the price quotes or take advantage of them. What you should never do is be influenced by it.

For example, if you have really done your homework on Meta Platforms (FB). you would know that it’s worth at least $400 per share (even if their metaverse project fails and the growth of its legacy business slows down).

If you don’t like the business, don’t understand the business, or think the business is no longer viable, sell the stock and move on to a business you know and believe in.

Mental Trap #2: You Equate The Market Price To The Value Of The Shares  

Successful investors know that the market price quoted can be totally different from what the actual business is worth. This kind of mispricing happens during times like these. Markets swing from extreme optimism to extreme pessimism.

“The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.” 

― Benjamin Graham, Father of Value Investing 

Ignorant investors equate market price to the success of their investment. When the price goes up, they think the investment (business) is doing well, when the price goes down, they think the investment is doing badly.

Intelligent investors know that in the last 6 months, nothing has really changed in the businesses they own. If anything, the businesses are actually selling more products and generating more cash. 

Microsoft (MSFT), Salesforce (CRM), Mcdonalds (MCD), Starbucks (SBUX), etc… are selling more and more software, coffee, ads, burgers and they will continue to sell even more in the future. The businesses are making more money and are worth more today than they were a year ago. Yet, they could be selling at lower prices because of panic selling and manipulation. This should be celebrated and not a cause for worry.

Learn to focus on the business and not the market price in determining how well your investments are doing. Free your mind from the matrix of the markets and wake up to look at the real business. It will change your perspective, your emotions, and the decisions you make. 

Mental Trap #3: You Have Invested With Money You Need In The Short Term or Borrowed Money (Scared Money)

Some people look at the market price being down 30% and say that they have “LOST” money. They use words like “bleeding”, “falling knife”, “hurt”, “pain”. These are words the media likes to use to invoke emotions and get you to watch more of their shows. After all, fear sells.

Be careful of the words you use. Your words affect your mindset. If you want to change your mindset, you have to change the words you say to yourself. Words have power over you.

If you think about it logically … unless you are being forced to sell because you need the money, you have not lost anything. The market quote means nothing unless you choose to act on it. Imagine you bought an apartment is a good location, good facilities, well maintained that’s worth $500,000. You are renting it out for $25,000 net income a year. A $25,000 rental income out of a $500,000 asset comes up to a 5% yield, which is a fair value.

Your neighbor is forced to sell his exact same apartment for $300,000 because he needs the money for an urgent operation. Did you lose $200,000? Of course not. Are you forced to sell at $200,00? If you are not, then the latest transacted price does not concern you. 

Unfortunately, many people have bought stocks at all-time highs with borrowed money or money they needed urgently. Now that prices have fallen, they are being forced to sell to pay back their loans (margin calls) or to meet their financial needs. This forced selling is causing prices to fall more in the short term.

If you have invested with money you don’t need urgently, then it makes no difference what the market quotes today. The lost is an illusion that you created in your own mind. 

Mental Trap #4: You Have Not Practiced Proper Portfolio Diversification And Allocation  

If you have overallocated to one particular stock or one particular sector that happened to be at the epicenter of the sell-off (e.g. BABA, FB), then you may be experiencing a much larger drawdown than usual.

This is why it is very important to diversify into at least 10 to 30 great businesses and have exposure to several sectors. No matter how attractive a stock is, don’t put all your eggs into one basket. Do not allocate more than 10% to any single business.

Even a fundamentally good business can drop 50% or more in the short term because of short-term problems or negative sentiment. Boeing (BA) fell 80% during the early parts of the pandemic/ grounding of its planes. FB is down 40% because of negative sentiment. BABA is down over 69% because of negative sentiment and a temporary slowdown in growth. 

In summary, if you have invested in good businesses and bought at reasonable prices that were undervalued, you will do well over time. You have done your job as an investor. You will be richly rewarded with patience. 

No reason to get worried or stressed out during temporary drawdowns. 

No reason to regret buying earlier at a higher price as there is no way you could have predicted it going lower after buying.

As long as you had followed your investment plan, you should have zero regrets, zero worries, and zero concerns.

It gets easier and easier each time. Students who have been with my community since 2005, are sipping their Martini watching how the show will continue to unfold.

Will The Stock Market Crash in 2022?

What are the chances of a Bear Market or a recession this year?

The economic and geopolitical variables are constantly evolving, and the risk of a recession is definitely increasing with the Russian invasion of Ukraine dragging on, the West imposing unprecedented sanctions, and oil prices rising to a 14-year high. 

The one thing that may push the US and global economy into a recession would be consistently high oil prices. 

Since the 1990s, every time oil prices go up 100% in a one-year period, a recession has followed. Oil prices drive gas prices and consumer spending makes up 70% of the U.S. economy. Higher gas prices would mean less disposable income for other goods and services. 

There are also recent periods when oil prices spikes did not lead to a recession. This was the case in 1987 and 2011. 

The bottom line is that while high oil prices may increase the risk of a recession, I would not worry much about it. Stick to your investment plan, stay the course and you will reap the rewards. 

My Investment Plan For Long-Term Returns & Outperformance

My strategy is to continue to hold and add shares of my portfolio stocks when they are undervalued (dropped to their support levels). 

Now, it looks like the majority of my stocks are attractively undervalued so I have been buying consistently, and will continue buying over the next several months. As long as my stocks have not reached their full allocation in my portfolio (i.e. 5% maximum), I will continue to buy more.

Discipline yourself to stick to your investment plan. Always keep a cool head so that you never panic and sell good companies that are temporarily down due to short-term bad news. Never chase hot stocks and sectors that are the flavor of the moment.

For those of you newbies struggling with trading psychology and sticking to your investment strategy, I do recommend that you take a look at my WHALE INVESTOR™ Course. It will train you and equip you with a complete investing skillset — Stock Market Basics, Fundamental & Technical Analysis, and Trading Psychology.