This past week ranks up there as one of the crazier ones I’ve seen in my 30 years in the investment industry — and there were only four trading days!
Futures swung wildly. The S&P 500 dipped into correction territory for the second time in a month. The Nasdaq Composite entered a full-blown bear market (down 20% from its high) on Thursday, but if you blinked you probably missed it. By the end of the day, it had rallied 7% from its lows to finish up more than 3%.
And then there are the headlines. Russia’s invasion of Ukraine has increased fears among investors, escalated global tensions and sent already higher energy prices surging even more. Oil topped $100 a barrel for the first time in nearly eight years.
When the headlines are scary and investors are selling pretty much anything and everything, it can cause even the best and most experienced investors to question holding on to their stocks.
Here’s my advice: If you own good stocks to begin with, you probably want to fight the urge to sell.
I couldn’t even begin to count the number of times I’ve seen investors sell in a panic, only to find out that they didn’t really save themselves from anything. They simply locked in big losses. I think we’re seeing a lot of that right now.
The Nasdaq’s brief foray into a bear market got all of the attention, but the truth is that many individual stocks and sectors had already fallen into bear-market territory.
To qualify as a bear market, an index or sector must fall at least 20% from a price peak. Based on that simple definition, I recently calculated that no fewer than two-thirds of the 3,650 stocks inside the Nasdaq suffered a bear-market decline during the last 12 months! Plus, more than half of the stocks in the Nasdaq were languishing 40% or more below their peak levels of the last year.
That may come as a surprise. After all, many of the technologies in focus today are arguably more potent and transformational than those of two decades ago and hold more long-term upside potential. But human psychology never changes — especially not the psychology that causes the stock market to cycle through periods of low valuation to high valuation and back again.
In that context, the stock market’s current bearish interlude is not a surprise. Nor would it be a surprise if the market stays rocky over the coming weeks or even months, especially given the latest headlines.
We should not ignore the risk, but neither should we let it chase us out of the market. I’ve found it works better to stay with high-quality stocks as part of a disciplined, long-term strategy that does not include panic selling.
In other words, the best defense is a strong offense.
Think about Amazon (NASDAQ:AMZN) for a second. That stock is up more than 100,000% since it went public, yet there were massive drops along the way.
Look at the chart below and you can see multiple 30% pullbacks, a few 60% drops and even a 90% plummet back in 2001.
After every single one, Amazon shares went on to new highs. Why? Because the company itself matters much more than the broad market, the economy, or anything else. If a business is innovative, provides value to customers, outperforms the competition, has a smart business model and operates in a powerful trend, odds are incredibly high it will grow substantially and become a moneymaker over time.
It is easy to lose sight of that fact when you’re watching a stock’s price go down. It is easy to want to sell everything and crawl into a hole until the storm passes.
But that’s not what the great investors do. They stay with high-quality stocks they already own, confident in the long-term trajectory of the companies and their stock prices.
By the way, the stock market has a perfect record of recovery. There have been more than a dozen bear markets since 1930. Stocks rallied to new all-time highs after every single one, from Black Monday in 1987 (when the Dow Jones Industrial Average fell 22% in one day)… to the dot-com bust in the early 2000s… to the financial crisis of 2008.
Zooming out even further, stocks appreciated about 1.5 million percent in the 20th century. And if you know your history, you know that century was filled with wars, recessions, depressions, crises, bear markets and more.
These are the times to heed the advice of Rudyard Kipling:
“Keep your head when all about you are losing theirs.”
Originally published on InvestorPlace.com
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.