With apologies to Rudyard Kipling:
"When panic engulfs the market investors that can keep their head when all others are losing theirs will enjoy the gains of men not mice."
Rather than ignoring the emotions that all investors go through when markets decline, I believe it is important to embrace the feelings of fear, doubt and greed which are flowing through your veins and prepare a plan to take advantage of these emotions.
First let me start by saying if you are nervous about what lies ahead for the market for the next few days or weeks, you can feel safe in the knowledge that you are not alone. I am standing alongside you also worried, but I am also determined not to be paralysed by fear.
To this end I have devised a 3-step plan to combat the worst that Mr Market can throw at me.
Step 1 – Combating Fear
When markets go into steep decline the feeling of fear is normal. Unless you were born with ice in your veins (I know I wasn't) you can take solace in the knowledge that you are definitely not alone. Around the world at this very moment, there are millions of investors staring at their PCs going through the exact same feelings as you are.
Plan
At times like these I find history a consoling tool. Remember the Global Financial Crisis? The worst financial crisis since the great depression? Well many were calling it the end of the capitalist system. Fortunately for us this was not the case and time and time again it is not the case, despite the very best or worst "expert" predictions.
History also reminds me that I was able to buy Macquarie Group Ltd (ASX: MQG) at $22 and Westpac Banking Corp (ASX: WBC) at $16 during the height of the GFC.
Investors gripped with fear and fingers poised over the sell button would be wise to heed the words of philosopher George Santayana "those who cannot remember the past, are condemned to repeat it."
Step 2- Dealing with Doubt
Again you are not human if you don't doubt yourself during times of turmoil. It is your opinion against the crowd and it is definitely easier to run with the herd. In 1951 social psychologist Solomon Asch conducted an experiment into social conformity. He found that on average 1 in 3 people will agree with a blatantly wrong answer so as not to stand out from the crowd.
Plan
Doubt is a great motivator and makes investors feel the need to do something where the right approach may actually be to do nothing. To contend my need for action during times of panic, I review my investments for any changes to the original thesis. The act of checking placates my need to act. It is also important at these times that investors do not isolate themselves behind their desk, they should seek further information and look for ideas outside of their own.
Step 3- The Need for Greed
Now this emotion can be a two-edged sword. It is good because it drives you to pick up bargains when others are fearful but it can also cause you to over-commit or jump in too early.
Plan
Here I like to follow the lead of legendary investor John Templeton. Templeton stressed the need to buy low priced investments with excellent long term outlooks. To do this he avoided small speculative stocks during times of turmoil; and to negate the emotional roller coaster of volatile markets, he would place limit orders at the price he required then walk away from the screen. This way he was not influenced by any outside events other than his own valuations.
Foolish takeaway
I find it strange that at times of market turmoil many pundits claim it is not a good time to be a value or long-term investor. This couldn't be further from the truth. Volatile times are when value investing comes into its own. As any gardener can tell you seeds sown in the deepest winter bloom brightest in the sunshine of spring.
