The turbulence in international banking of late may be giving you that queasy here-we-go-again feeling. We all have unpleasant memories of the 2008 global financial crisis that caused financial institutions to fail, the stock market to tank and a global recession to take hold.
This time around the culprit is the impact of rising interest rates on the balance sheets of some banks, but the situation is very different from the 2008 crisis as observers have noted. The consensus is that the financial system remains sound, thanks in part to reforms enacted after 2008. The Canadian banking system performed admirably during the last crisis and looks well-positioned to weather this one.
Still, banking turmoil is unwelcome coming on top of an already volatile stock market, high inflation and continuing geo-political upheaval sparked by Russia’s invasion of Ukraine. At times like these, it might seem like the best investment move is to stay on the sidelines until things calm down.
Unfortunately, as this article from Dimensional Fund Advisors notes, volatility is unavoidable. However, it can create buying opportunities. Of all Warren Buffett’s pearls of wisdom about investing, one of the hardest ones to truly embrace is the idea that you should be buying stocks when they’re down.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down,” Warren Buffet, 2008 letter to Berkshire Hathaway shareholders
You can save a lot of money this way. When demand drops and there’s pressure to sell, you can step in and get better value for your money. You can buy from a retailer who needs to liquidate merchandise; buy last year’s iPhone after the release of the newest version; or ride to the rescue of a car dealership in danger of missing a crucial sales target.
As Buffett observed, the same mindset holds for the stock market. But stocks are different because the stakes are higher. These are your savings and you’re hoping to make a decent return to fund big projects like buying a house, paying for your kids’ education and ensuring a comfortable retirement.
There’s a lot more emotion tied up with investing money than buying a pair of socks. When the market is rising and the future looks bright, FOMO (fear of missing out) can be strong. A couple of years ago, that was the case with the rush to buy tech stocks, shares in Tesla and cryptocurrencies.
But when the market falls and there seems no end to the bad news, fear and regret can quickly take over. You may rationally understand that stocks are selling at substantially lower prices than they were, and this presents an opportunity. In reality, it’s all too easy to persuade yourself to wait until they get even cheaper or, worse, sell your stocks “until the clouds clear.”
However, we know the S&P 500, for example, is about 18% less expensive than its peak in late 2021. U.S. stocks might become cheaper still in the next few weeks or months, but their decline so far has improved their long-term expected returns.
On the portfolio level, value stocks have done much better than growth stocks in the last year as we noted in our annual presentation. That’s a big turn around a couple of years ago when value stocks languished as tech and other growth stocks shot ever higher.
If you believe the stock market will recover over the long run as it always has in the past and hold a broadly diversified portfolio that fits your risk tolerance, then you should try to emulate a mindset suggested by another famous Buffett maxim:
“Be greedy when others are fearful and fearful when others are greedy.”
In my next blog in two weeks, I’ll provide an update on market and portfolio performances over the first quarter of 2023 which most readers are likely to find a pleasant surprise despite the current fears. Stay tuned…