Life entails a certain amount of pain.  As I get older I can relate more to the physical kind.  Aches, pains, things that I didn't notice in my twenties and thirties now greet me in my fifties. There are other pains as well, including mental pain or anguish.  If you've been invested in the stock market for any length of time, or if you're new to the game, you have probably experienced firsthand this type of pain.

 

Stock markets generally provide rewards over very long time periods.  A dollar invested back in 1926 when modern stock market record-keeping began, has grown to over $5,000 today.  That sounds impressive, and it is.  But it's only a 10% annual return.  What's impressive is that it takes 90 years to get to this point.

 

What's sobering is that the ride has been far from smooth.  In fact, it's often very bumpy.  As the chart below shows, roughly 1 of every 4 years is a loser.  Bear markets are a fact of life.  But nobody has figured out how to consistently sidestep these losing periods.  I have yet to find someone who can consistently time the market.  The reality is you must put up with occasional negative results if you want to create stock market wealth over the long run.

 

 

 

Fine you say, I understand this.  Understanding is the rational side of you.  The emotional side rears its ugly head when push comes to shove.  Meaning when markets drop 20-30%, I guarantee your emotional self will suddenly come to life and ask the rational side "what is going on?"  and will likely follow up with the classic fight or flight response, as in "let's get the heck outta here!"  If the emotional side declares victory you can find yourself selling during a market decline.  Also known, as "buy high, sell low."  Not exactly the road to long-term success.  But it can create short-term comfort.  

 

We need to understand that the emotional responses that can influence our short run thinking are often at odds with our more rational long-term selves.

 

If it's any comfort, you are not alone.  The titans of industry, the captains of commerce, also known as the CEOs of the Fortune 500 companies, are also susceptible to bouts of temporary foolishness.  Yes, large corporations, with multi-billion dollar sales and large corporate staffs, make the same mistakes.  Buying high, and occasionally selling low. 

 

The chart below depicts the share repurchase activity for large U.S. corporations.  As you can see, these behemoths of business follow the stock market, buying much more of their own stock when stock markets are richly valued, and buying much less when stock prices are depressed.  Sophisticated they may be, but when times are good most CEOs are feeling good, and spend freely on buybacks.  And when the skies darken and the cold winds howl, these high-priced decision-makers resort to the corporate equivalent of thumb-sucking, letting short-term comfort replace sound, rational long-term thinking by passing up on the opportunity to buy back their stock at a discount to true business value.

 

 

 

So, what's an investor to do?  A more rational response to the pain of large market declines would be to recognize that part of "buy low, sell high" means that we need to be willing to experience the temporary pain that allows us to hold on or buy more during low periods.  There simply is no free lunch in a highly competitive arena like the stock market. 

 

Try taking a step away from CNBC and financial websites (and your account balances!) to help ease the pain a bit.  One way to think about it is that most homeowners have a long term mentality when they think about home values.  Investing in businesses via the stock market should be thought of the same way.  It's hard to do with CNBC screaming and your account values just a few computer clicks away.

Ultimately, our "ability to suffer" during weak markets is the necessary price that's paid to allow for bargain purchases.  And the reason bargains are available is because your neighbor can't stand the pain, and is probably selling you the undervalued stock that you're purchasing.  Be sure to thank him or her the next time a bear market rolls around.