irrationalmarket crashmultibaggerprofit bookingtrim back

Markets can remain irrational longer than you can remain solvent.

Benjamin Graham, the father of value investing, divided investors into two types in his book The Intelligent Investor – defensive and enterprising.

The defensive investor, wants to avoid “serious mistakes
or losses” and seeks “freedom from effort, annoyance and the need for making frequent decisions.”

The enterprising investor, as per Graham, is willing “to devote time and care to the selection of securities that are both sound and more attractive than the average.”

So, if you are an enterprising investor, then you should observe the stock market carefully in the hope that a substantial fall will present bargains. But if you are a defensive investor, you should observe yourself carefully.

  1. If you are not nearing retirement and have many years to invest and thus ability to see through a few big downturns;
  2. If you are not investing on borrowed money;
  3. If you are investing your own money, not other people’s money;
  4. If you do not owe a lot of money by way of loans, and have sufficient disposable income that prevents you from selling your stocks to meet your needs; and
  5. If you have seen through past market crises without much psychological upheavals…
…you have adequate resilience to manage any major stress that the stock market may present you now.
However, if you do not meet any or most of the above criteria, then beware. Reconsider your decision to be in stocks directly. Else, maybe, trim back on your stocks to create the much needed financial cushion so that any big decline does not become an even more expensive way for you to find out who you are…

Market has trends and some fashionable icons who claim their philosophies of overpaying for quality. Something recently has happened to the guys who were utterly charmed by “moats” and forgot the subtle difference between paying up and overpaying over the last two years. A lot of such moated darlings are down between 30% and 50% over the past six months. Those who would have borrowed money to invest in such stocks are sitting on even bigger losses and much bigger dents to their egos.

Sometimes, knowing more about who you are as an investor can make you a fortune – or save you one. Knowing how resilient you and your portfolio are to severe market downturns also solves that purpose.

How easily can you bounce back from a market crash? What would be your reaction to a sharp decline in your stocks’ prices? How many ‘surprises’ can you withstand in quick succession? How safe are your overall finances in light of extreme stress on the equity component of your portfolio?

These are extremely important questions you must ask yourself every time you are looking at your portfolio, or looking to spend cash to buy more stocks.

Finally, Money is yours, so does profit and loss …

Think over it….

Happy investing…

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