Rely on experience:Experience is valuable. Someone who has experienced a full economic and stock market cycle will have a better idea of hard times. While no two crises are similar, it is the ability to learn from today’s events in a historical context that helps tide through volatile periods. Also, asking the fundamental question — ‘does this make sense?’ — at the right time is crucial.
Use the mind as a filter: There is no dearth of data, views and opinions on TV and in newspapers. It is important to know how to process this information. Excessive availability of information has made it difficult to differentiate it qualitatively. Everybody gets the same data; it’s how one analyses it that makes the difference. The ability to focus on fundamentals and not get dragged into short-term action is critical during volatile times.
Fear being blindsided:While it’s important to think independently, one needs to be tuned into price action. Perception is important in the markets as extreme views can upturn the intrinsic merits of your holdings. Differing opinions throw up opportunities or highlight concerns that aren’t ordinarily visible. One needs to keep an open mind.
Stay unbiased: Stock prices often reflect the market environment and investor sentiment. That’s why, on a relative basis, some businesses seem ‘cheap’ or ‘expensive’ at the same index level. Hence, being unbiased and having a balanced approach helps identify opportunities that spring up during the normal course of the markets. Similarly, being open to possibilities also assists in raising doubts and identifying challenges at appropriate times. Avoiding herd mentality and having an independent thought process helps.
Avoid sticker shock:Equities as an asset class gives superior risk-adjusted returns over an extended period of time. However, the risk associated with it is also well established. Thus, it’s important to buy cheap to have a margin of safety. Purchasing companies at a discount for their long-term intrinsic value by understanding fundamentals is crucial to being successful. Buying the right stock at lower prices increases the chances of making money.β\