“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
Peter Lynch is arguably the greatest mutual fund manager of all-time. While he was at the helm of the Fidelity Magellan Fund from 1977-1990 Lynch produced annual returns in excess of 29% per year. To put these numbers in perspective, investors would have doubled their money every two-and-a-half years at 29% annual gains.
Yet this was not an easy time to be an investor by any stretch of the imagination. This period included sky-high inflation during the 1970s, a nasty recession in the early 1980s which led to double-digit unemployment and the 1987 crash that wiped out more than 20% in a single day.
The stock market experienced a number of sell-offs during Lynch’s run of extraordinary performance. His thoughts on how to view these stock market downturns are just as relevant today as they were when he shared them in an interview with the PBS program Frontline in the mid-1990s:
"Now no one seems to know when they are gonna happen. At least if they know about ‘em, they’re not telling anybody about ‘em. I don’t remember anybody predicting the market right more than once, and they predict a lot. So they’re gonna happen. If you’re in the market, you have to know there’s going to be declines. And they’re going to happen every couple of years you’re going to get a 10 percent correction. That’s a euphemism for losing a lot of money rapidly. That’s what a “correction” is called. And a bear market is 20-25-30 percent decline.
They’re gonna happen. When they’re gonna start, no one knows. If you’re not ready for that, you shouldn’t be in the stock market. I mean the stomach is the key organ here. It’s not the brain. Do you have the stomach for these kinds of declines? And what’s your timing like? Is your horizon one year? Is your horizon ten years or 20 years?
What the market’s going to do in one or two years, you don’t know. Time is on your side in the stock market.”
The most important point here is that no one knows when or why corrections are going to happen. Investors are continually searching for reasons for stocks to fall, but should really only concern themselves with the fact that they will go down eventually for any number of reasons.
There’s always something to fear that will possibly derail the market — profit margins, valuations, earnings shortfalls, economic growth, rising/falling interest rates, inflation/deflation, geopolitical risks and the list could go on forever.
The problem is sometimes stocks rise and fall for no apparent reason whatsoever. Occasionally these issues “matter” but other times the market simply shrugs them off.
This past Thursday’s 2% loss in the S&P 500 is a case in point. There really wasn’t much to offer as an explanation as to why the market fell so much last week. There’s not always going to be a neat and tidy explanation except for the fact that there are times when there’s more selling pressure than buying pressure.
Understanding stocks can and will fall is helpful to prepare yourself mentally for how you’ll react once they do. But bracing for impact at all times can be counterproductive to a good investment process.
Photo: 401(k) 2012
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