“A lot of guys who have never choked have never been in the position to do so.”  – Tom Watson

In many ways, individual investors are often their own worst enemies.  But, can you blame them?  Many of the so-called experts are touting information that is often times a prediction that never comes to fruition.

If you want to invest wisely, you constantly need to be fighting off your own worst impulses.  We’re not robots, we have emotions, and those emotions can really throw you off your game.

Yet no matter how much we discuss this with investors, we constantly see sellers come out of the woodwork anytime an individual stock, or the overall market, takes a hit.  A simple reminder of why we first bought the investment and that nothing has changed within the company usually calms the situation.

Now, humans have only two helpful emotional responses when in an intense physical encounter.  Think of the firefighters responding to 9/11.  People were either fleeing or fighting to help others in need.  “Flight or Fight” as they say in psychology class.

But it’s not a useful emotion when it comes to analyzing the stock market, where you’re running away when maybe you should be running toward stocks.

The truth is, there will almost always be a better time to sell than during a panic, a better time to leave the table, than whatever moment inspired you to panic in the first place.

Remember in 2010 during the market’s flash crash?  The Dow Jones Industrial Average fell almost 1,000 points in less than half an hour.  The experts were out in full force saying how this as the beginning of another massive crash like we had earlier in 2007-2009.

Naturally, investors panicked, dumping their stocks as part of a mass selling frenzy. They were not going to get burned again and thought they could time the markets since the experts were not always right  (By the way, nobody has ever consistently been able to time the markets over time).  As we watched the ticker tape that nerve racking afternoon, we couldn’t believe what we were seeing. It looked like people were selling for no reason other than to sell.

We urged clients to pick a stock they loved and we would buy it using limit orders, basically calling out the price you want to pay and see if we could get it by the end of the day.

The result? To this day, people still come up to me and thank me for that advice during the flash crash.  But I simply put my rule into practice, realizing that nobody ever made a dime panicking.  And, I tried to help them profit from it.  If someone watches the markets every day, you can see behavioral swings.

Ignore emotions

Keeping an even keel or hiring a financial adviser to help you keep an even keel,  and planning sell-off strategies ahead of time can really help investors buck the panic.  Making smart choices with regards to individual holdings is how money is made when stocks are on sale.

And while we’re not saying that investors should buy every stock on their most wanted list every single time there’s a sell-off, there is value in occasionally swimming upstream.

The next time there’s a big, market-wide sell-off and you feel like fleeing and never touching a stock again, I want you to do something for me. I want you to take the opposite side of your emotions, the opposite side of the trade.  Take a deep breath and wait for the rebound before you sell.

It’s kind of like teaching a junior golfer to hit the ball over the green when they always seem to come up short of the green.

When the stock market gets unrelentingly negative, remember that he who defends everything defends nothing. What exactly does that mean? It’s about how you evaluate your holdings.  This is something we do at B P Financial so that investors don’t have to rush to a decision.

Investors can’t possibly hang on to every stock they own during a big decline. Some stocks just won’t fit the new environment and will hurt you if you don’t sell.  If you treat every single decline as a buying opportunity, you’ll quickly waste all your cash building positions, and end up unprepared for future declines.

Pick the best stocks to buy into weakness and sell the rest to raise cash.

Vicious, negative markets can give you buying opportunities, but you need to focus your capital on your absolute favorites rather than chasing bargains in lower quality merchandise when it turns out they weren’t bargains at all.

Great investors know how to ignore their emotions when those emotions get in the way of making money. So the next time the market gets slammed, don’t panic, call us.


Blake Parrish, CFP®
Senior VP, Portfolio Manager
Phone: (503) 619-7237
E-mail: blake@bpfinancialassoc.com

Certified Financial Planner Boardof Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”