2 Lessons Long Term Investors Can Learn From the Recent Stock Market Plunge
Fall 2008. Hurricane Ike left most of Houston with no power for two weeks. So the stream of news came mostly through the tiny screen of my Blackberry:
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- Government takes over Fannie and Freddie.
- Bank of America takes over Merrill Lynch.
- Lehman Brothers is bankrupt.
- AIG is taken over and bailed out.
- Washington Mutual is closed by regulators.
And on and on.
Our morning routine during those troublesome times included three steps:
- Get out of bed.
- Turn on CNN.
- Wonder why we got out of bed in the first place.
It was brutal. We were being fed bad news and fear out of a fireman’s hose with our permission!
Then one day in 2009, we decided to permanently withdraw that permission. We have not watched cable TV news since, and I have to say, it’s one of the best decisions we have ever made.
Stock Market Aneurysm
I told you that story because earlier this week, the stock market had one of its “mental breakdowns” again, and it reminded me of those days. Minutes after opening, the Dow dropped 1100 points after having dropped about 1000 points the previous week. Then it recovered about half those losses a few hours later. But it didn’t matter—the rollercoaster ride had whipped the country into a frenzy and had them glued to CNN/Fox/MSNBC.
As frightful as that may have been, I believe there are two crucial lessons long term real estate investors should learn from the latest stock market slide.
Lesson 1: Go on a LID (Low Information Diet)
Nota bene: If you are a long term investor, there are absolutely zero reasons why you should check the stock market on a daily basis and listen to talking heads pull predictions out of their posterior. Furthermore, what the stock market does intra-day should have no bearing on your decision making whatsoever.
Think about it—the “information” they are peddling leads to just three possible outcomes:
- You become so fearful that you sell at the worst possible time (don’t do it!)
- You become so fearful that you freeze and stop taking the actions your long term strategy requires
- Or you become so speculative that you buy more in anticipation of a bounce.
None of those decisions are aligned with the long term investor’s credo that your investment decisions should be guided by a long term overarching strategy. Trust me on this: Decisions made under the influence of fear never bode well for the investor making them.
To borrow a phrase from Tim Ferriss’ excellent book The 4-Hour Workweek: ‘Choose to go on a “low information diet.”’ You will be happier and will make better decisions. For the love of all that is holy, turn off cable news and spare yourself the drama. Check your stock portfolio monthly—let the ups and downs even out as they inevitably do without frustrating you to no end.
But wait a minute, I hear you say, don’t we have a duty to be informed citizens? Think about the last time you went on vacation. You probably ditched the cell phone, didn’t check the endless stream of “news” every 5 minutes, and what happened? Did the world end because you failed to be “informed” about the latest outfit the Kardashian sisters wore?
Lesson 2: Stay Disciplined
Mark Cuban once said, “Everyone’s a genius in a bull market.” As long as the market is going up, you click a button to buy some stock or sign a stack of papers to buy a property and just watch it rise. That takes very little discipline. The mettle is tested in volatility. Can you stick to your plan when CNBC is telling you to get in a fetal position and don’t change that dial? That takes discipline. Can you pull the trigger on your acquisitions when everyone else is on “wait and see” mode? That takes discipline. Can you hold onto your assets in a less than favorable housing market instead of panic selling? That takes discipline.
A few months ago, I was meeting with a new client in my office. He wanted to invest in real estate long term to achieve financial independence in 12 years. After I went over the strategy I would use to achieve that goal, he looked puzzled, bordering on skeptical. “This makes perfect sense,” he said, “but it’s almost too simple. If it truly is so simple, why isn’t everyone retiring with over a million on paid off real estate and six figure incomes?”
While I understand the skepticism, the answer to his question is also simple. The strategy is simple—its execution is not easy. Investing in real estate long term requires tremendous discipline in the face of adverse conditions and laser focus.
When adverse conditions condition your thinking (see what I did there), stay disciplined. Take out your written list of goals (if you don’t have one, now you have homework) and review it. Stay focused on your long term goals and take action according to your long term strategy. If it calls for acquisitions, purchase. If it calls for debt deleveraging, pay down those mortgages. If it calls for liquidation, sell. But don’t do any of those things under the influence of fear mongering.
Do you watch the news every day? How did the recent stock market activity affect your investing actions?
Let’s talk in the comments section below.