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Investing In Shares When The Markets Decline

Investing in shares is not a complex process, but that does not mean it is easy. It takes understanding, thoughtful analysis and emotional maturity. It is no wonder that investors around the world – professionals and individuals alike – still find it difficult to not over react when markets crash.

History tells us that news of any market downturn creates panic and fear and causes investors to act irrationally. This is often when the best opportunities are presented.

Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.

Warren Buffett

It is important to fully understand your investment strategy and what the impact of a share price drop would mean for your future. Long-term investing in global brands and other quality businesses means that market declines may not have too much of a negative impact on your investment portfolio, and could instead present unique opportunities to expand or increase your shareholding.

When markets decline it means that you could purchase shares in solid global companies at a bargain. Selling off good stocks during a crash is a terrible idea and most investors feel the emotional urge to divest. The key to successful investing is to look at market crashes in a very different way. The world’s greatest investor, Warren Buffett, offered an exceptional perspective with a practical analogy in his letter to shareholders in 1997.

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

In essence, instead of getting excited at the thought of a luxury car being on sale and buying it, we turn around and leave the showroom. Is this not ironic? How often do we wish that expensive items would drop in price so that we can purchase them? Don’t we all love lower prices?

Good quality businesses may experience share price declines, but that doesn’t change the intrinsic value of the business. When markets decline, global brands will continue to pay dividends to their shareholders, as long as the intrinsic attributes of the company have not changed. This means you are still earning an income regardless of the share price movements.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Warren Buffett

It is important to prepare yourself mentally for market downturns, understand that share price fluctuations in good companies almost always have nothing to do with the company’s ability to perform. Stop yourself from being irrational, be level-headed and smart in the most unlikely of situations. At AXIAM we can guide you through this process and help you take advantage of market crashes to increase your wealth, contact us to discover how we do this.

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