Watching various mainstream news programmes in recent days would be enough to make any investor sell up and run a mile from shares. That’s because we have all apparently just lost billions of pounds in net worth in a matter of days and are now much, much poorer than we were at the start of the year. While this is true on paper, the reality is that being able to react positively to difficulties is a key part of being an investor since things won’t always go our way.
Take two of the best investors of all time as an example: Neil Woodford and Warren Buffett. They’ve delivered stunning returns over a long period of time and are rightly held in very high regard by most investors. However, neither of them bailed out of the market mid-way through last year because they saw they current ‘crash’ coming. Just like neither of them had 0% exposure to shares prior to the credit crunch either. In other words, even the best of the best can’t always predict downturns or bear markets.
However, what Woodford and Buffett are exceptionally skilful at doing is mastering their emotions. Just like all of us, they feel disappointment, fear, panic and greed because they’re human. But they’re able to overcome such weaknesses to focus on the long-term growth potential of a company, sector or stock market. As such, when things are at their worst and ‘blood is running in the streets’, they buy rather than sell.
In doing so, both investors have been able to lock-in future gains in high quality stocks that many other investors (both professional and private) have missed out on. For example, during the credit crunch Warren Buffett piled into financial stocks at a time when very, very few others gave them any kind of a chance of recovery. Similarly, Neil Woodford continues to stick by pharmaceutical and tobacco companies even when other sectors may appear to be more exciting in the short run.
This current episode of market turmoil is nothing new. Certainly, it’s unfortunate and means that investors are nursing portfolios that aren’t as high as they once were. However, the most surprising thing is that investors themselves are surprised by the current market woes, since market corrections and bear markets occur relatively frequently.
This time around, the problem isn’t linked to the financial system as it was in the credit crunch, but is rather focused on the growth prospects for China. And with the world’s second largest economy having unparalleled potential to grow into an even larger consumer of goods in the long run, buying shares with exposure to China could prove to be a sound move. Having the discipline and focus to do so, though, remains perhaps the hardest part of investing and is what separates good investors from great investors like Neil Woodford and Warren Buffett.
