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"If you can keep your head when all about you/ Are losing theirs...."

On the Importance of Hanging in

Obligatory adorable kitten blog photo
Kitty McClickbait never tries to catch a falling knife

We've written before about our four basic principles that inform our approach to investment management, but one whose importance cannot be overstated is our first principle, Don't try to beat the market. By this we mean not only that you shouldn't try to pick winners (unless all you do is trade stocks for a living), but we also mean that you shouldn't try to time the ups and downs of the market.

Markets gyrate with uncomfortable frequency. Things are always happening, and no one has a crystal ball. The best investors in the world make mistakes entering and exiting markets only to buy too dear and to sell too cheap. Stanley Druckenmiller, one of the best global macro managers of all time, was famous for thinking that the technology stock bubble of the late 90's and early 2000's was too frothy and bound to collapse eventually. He stayed on the sidelines until he couldn't withstand the criticism for not being in the market and then invested. The market promptly did as he had expected it to do, and that was to implode spectacularly, annihilate trillions of illusionary wealth, and kick off a recession that would last for years to come as the economy worked off its excesses.

This is not to say that Druckenmiller and others like him shouldn't be trying to time market peaks and troughs. There are many who do and should do, and Druckenmiller is one of the best of them. It is to say, however, that it's hard even for the best investors with piles of resources and experience at their disposal. If it's your job to time markets, that's one thing. Everyone else should keep in mind the following:

By maintaining a constant and regular plan of saving, you take advantage of something called "Dollar Cost Averaging". What this means is that your regular interval of investments has you sometimes buying high, and sometimes buying low. You end up getting what is basically average prices throughout time. You therefore don't buy too low--nor too high.

Secondly, selling when markets are falling means that you are putting your assets on sale, or offering a buyer a discount. If you stay invested, you will still hold the asset when its price recovers, and you will in effect be buying at your asset's value's trough. If you sell with the intention to buy back later, and you buy at any time after the asset has hit its trough, you will lose out on the value you could have captured just by holding--in effect, you will be paying a premium to buy back something that you just sold at a discount. Worse than that, you may sell at a discount, buy back at a premium, and then see the asset fall in price yet again.

Instead, be a contrarian by sticking to a constant, consistent investment plan, even during times of market stress. And when markets trend downward--and rest assured, they will--hang in there, knowing that just by being invested you will get the best average price for your patience over time.

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