Top 5 common blunders that investors may encounter during a crisis.
Mistake 1: “Let’s sell for now and wait for the dust to settle.”
The equivalent for cash-rich investors would be “Let’s keep the cash and wait for the dust to settle”. The S&P500 has rebounded by more than 108% since its low on March 23, 2020 and most investors that have not bought are still in waiting mode.
An alternative view: Instead of waiting, it is much better to build a solid exposure structured around well-defined investment themes, such as the US market.
Mistake 2: “The market is wrong.”
No, it is not. It is us as individuals who are wrong. At any point in time, the market simply discounts all public information available (the fundamentals) as well as investors’ psychology (momentum).
An alternative view: Never fight a trend. Most of the time, we understand several weeks/months later why the today’s market trades at current levels.
Mistake 3: “This time is different.”
No, it is never different. We may have felt this way because we were recently experiencing an unprecedented experience due to the pandemic, but the context is always different.
An alternative view: What never changes is our behaviour or our reaction, which is always based on greed and fear.
Mistake 4: “I cannot sell this stock at such a loss. Let’s keep it for a while and see what happens.”
Avoiding a loss (and keeping zombie stocks) is one of the worst strategies ever, in my opinion. … An unrealised loss is still a loss.
An alternative view: A crisis changes the world.
Mistake 5: “Buy low, sell high.”
Particularly in a positive market environment, you tend to have a contrarian approach and only buy stocks that trade at a low level.
An alternative view: A much more effective strategy is to “buy high, sell higher”.