Embrace Stock Market Chaos

Use Chaos in the Stock Market to Your Advantage

Chaos in Stock Market
Trader Shouting Order in Stock Market. Getty Images

Today's stock market plunge, on the heels of the weakness and chaos over the last few weeks, has encouraged me to write these thoughts, but the concepts I present here are absolutely timeless.

Whether in a complete market meltdown, or when we're approaching new highs, there are specific things to remember which will help you end up on top every time.

Once you are familiar with these tactics, you won't be one of the panicking masses, but rather calm and wise, picking your profits from out of the ashes.

Where is the Bull Market?

Even when the Dow Jones Industrial Average opened down over 1,000 points in the first few minutes the other day, and every major sector was trading lower, there was strength in gold prices and some other flight to safety assets.  

Even in the Great Depression, there were certain investments which did well, whether because they are life-and-death medications (pharmaceuticals), sin products (alcohol, cigarettes), or flight to safety assets (precious metals).

In fact, more millionaires were created during the Great Depression than any other time in history. Embrace the chaos, because that is where fortunes can be made.

Buying Businesses:

Always remember that when you are buying a share of stock, you are buying a share of a business.  Cast in that light, ask yourself if the underlying company can survive whatever current turmoil the economy is experiencing.

Do they have a solid financial position, with plenty of income and a low debt load?

 Are they insulated from potential market weakness with a solid backlog of orders and a diverse customer base?  You should learn all these things when you conduct proper due diligence.

Always Use Loss Limits:

Nothing protects you from any serious downside as well as loss limits.  I've said it many times, but in case you haven't heard, proper application of stop-loss orders is the single most important aspect of investing.

The Safe Port in the Storm:

Typically while the markets are crashing, the shares which hold up the best are the same shares which soar the most when things recover.  They don't suffer the full downside compared to most other investments, but they will still soften a bit because everything is heading lower.  Then, when the selling pressure lets up, those investments which fought the trend tend to pop higher in both the short and long term.

Do Not Sell When You Are Afraid:

If you don't like what you're seeing on the markets, and selling makes sense to you, then sure, sell away.  Liquidate any positions you want.  But just don't do it because you are freaked out or afraid.  

Any time you sell shares during a market panic, and because of a market panic, you are ditching your investments right into a stampede of sellers, and you will get far less for your shares than they are worth.  Often within weeks, those same shares are trading back up again to where there were before someone accidentally sat on the panic button.

Patience Leads to Full Rebound:

I've heard the expression to, "never say never."  Likewise, I also don't like to use the term, "always."

Yet, so far in the history of investing, the stock market always comes back.

  The only thing which changes is the timeframe you will need to wait.

In other words, if you are selling during a panic, you are acting as if the entire history of the stock market will suddenly, for the first time, change.  I don't like to say "always," but this market weakness will pass, just as each time previous.