The 3 Questions to ask in a Bear Market
I knew 2 of the questions but the third one was interestingly put in a writeup by entrepreneur and investor Shaan Puri.
I reproduce below the 3 questions with some thoughts by Shaan.
1. Did my belief change? Or just the Price?
2. Am I a Tourist? Or a Local?
Tourists leave when the weather gets bad. Locals know that seasons change and know how to live with the weather cycles.
Wise Investors are Locals. Others are tourists who leave when the stock market weather gets turbulent.
3. Is it crashing? Or is everything on sale?
How silly are our brains? When prices are going up, we wish we had bought more at lower prices.
Then prices go down, and we are too scared to buy.
I add a quote by Charlie Munger that sums up the answer to this question, “If you are not willing to react with equanimity to a market price decline of 50% two or three times a century you are not fit to be a common shareholder, and you deserve the mediocre result.”
I would say that 2 or 3 times a century is on the lower side and this number should be at least 6-10 times every 100 years or once every 7-10 years. By the way in Crypto Land, a drawdown of 50% is even more common. In the last 2 years, we have witnessed it at least 3 times.
The point is wise investors are locals who know that this is just the way it is. They ride the storm and do not interrupt the compounding train.