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Why you should treat market tantrums with a firm hand

Iron ore has been all over the news recently — including right here at fool.com.au — because humans love news, and share-market news is usually driven by fear, greed, and tales of hundreds of millions of dollars going up in smoke overnight.

It’s a heady mix, and Foolish writers love a good market hiccup as much as anybody, not least because one person’s misfortunes are often another’s golden opportunity.

If you’re a regular market watcher, you’ll have noticed the histrionics on Monday and Tuesday when the price of iron fell more than 10%, and iron companies saw up to 20% wiped off the value of their share price. BC Iron (ASX: BCI) fell from recent highs of $5.40 down to ~$4.50, a fall echoed in other miners such as Fortescue Metals Group (ASX: FMG), Rio Tinto (ASX: RIO), and BHP Billiton (ASX: BHP).

BC Iron has bounced back 20% from its lowest trading point (not its close price) in the past two days to ~$4.93 and other miners have experienced a similar, albeit more modest, recovery.

The Motley Fool generally advocates a buy and hold mentality for building wealth, and market behaviours like this indicate just how sound a strategy like that can be.  If you’d been caught up in the panic over the falling iron price and sold your shares three days ago, you would have missed the recovery. You also no longer own your iron mining shares which, as a wise and intelligent investor, you (hopefully) bought for good reasons.

It is better to modify your portfolio for the conditions you expect to see in six months or a year’s time (at least), and not the conditions you see right now. Investing in the heat of the moment is a sure way to get caught by market movements. Fellow writer Owen Raskiewicz details his journey as a Cash Converters (ASX: CCV) shareholder following its decline in profit growth after new Federal government legislation.

In that situation also, investors would have been better off selling before the legislation came in, rather than selling afterwards in disappointment as below-average results dragged the share price down. Even investors who sold ‘before the fact’, as it were, may find themselves to be worse off in three to five years’ time as Cash Converters’ great business continues to grow.

There is one other compelling reason to buy and hold, and that is automated computer trading programs. There are a large number of computer sellers in the ASX at the moment, providing much of the volume and liquidity. Shares that look to be heading down for the day (like on the back of iron price declines) will be automatically sold, and can be purchased back at a lower price.

Imagine you knew that share XYZ was going to decline, so you sold 10,000 shares in the morning at $1 each. The share price then falls to $0.90, where you buy back your 10,000 shares. You now own 10,000 shares for $9000, having made a $1,000 profit and also proportionately increased your dividend yield because your shares are cheaper.

Foolish takeaway

It’s all doom and gloom in the share-market game, but ruling your head and your emotions with a firm hand are the only way to make a profit. Make the market work for you, and treat its tantrums with the attention they deserve.

 

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