In his article “Patient Investors Will Always Win” Morgan Housel of Fool.com quotes Tolstoy’s immortal saying “The two most powerful warriors are patience and time” and proves with empirical evidence that investors who just buy and hold stocks instead of trading in them never lose money in the long-term despite periods of extreme volatility.
To prove his point, Morgan Housel takes the case of the S&P 500 since 1928. Since 1928, there are 20 periods when the index went in for a free fall of a 20%-or-more decline. However, if you had tightly held onto your stocks, your money would have multiplied nearly 100 times during this period (140 times with dividends and inflation factored in).
He also cites the example of Coca-Cola which in the period since 1968 has lost more than 20% of its value six times during that period. Yet, Coca-Cola has given a CAGR return of 12.5% since then making its shareholders millionaires.
Talking about Coca-Cola, one must note that it is Warren Buffett’s favourite example to prove why you should just buy top-quality businesses and sit tight. In a Youtube interview, Warren Buffett points out that Coca-Cola came out with an IPO at $40 per share in 1919. One year later, it had lost 50% of its value and was quoting at $19 per share. After that there were numerous crises like the Great Depression, sugar rationing, World War II and innumerable others. But if you held on to that one IPO share and reinvested the dividends, it would be worth $5 Million today.
The surprising thing, Morgan Housel points out, is that even if your timing was totally lousy and you had bought at the absolute peak of the markets (peak of the dot-com bubble in 2000, top in 2007, the day before 9/11) you would have still recovered your money or made a bit.
Morgan Housel points out that most investors do not have the temperament to hold stocks for a long term because they are scared of volatility. Also, they lack the patience and require the thrill of something more. They are also convinced of their ability to time the market and avoid buying when the values are low. They also act emotionally, buying at the top and selling out in panic at the bottom of markets.
Morgan Housel advises investors to change their ways and come to terms with volatility in the market. The fact that stock prices will crash is a reality that they must accept and take advantage of. It is as normal as “the flu” he says and just requires a bit of waiting out for things to normalize.
Here, one is reminded of the golden words of Benjamin Graham who in his classic treatise “The Intelligent Investor” remarked decades ago that “The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage“.
Benjamin Graham suggested that investors needed to change their mentality so that instead of ruing the dip in stock prices, they should welcome it in the same way that they welcome a discount given by a shopkeeper.
From a practical angle, the best thing to do in terms of a stock market crash is to watch the videos of past crashes and the dirt cheap prices that you could have bought your favourite stocks for. That will definitely get rid of your fear and motivate you to buy stocks.