Invest in Fear (But Don’t be Scared)
Photo by Enrique Guzmán Egas on Unsplash
Here's how to use the stock market's least favorite four-letter word to your advantage
Fear is, at least in terms of investing, what procrastination is to productivity.
The writer can only look at a blank screen for so long. Eventually, they’re going to have to write something. The painter, no matter how many Bob Ross videos they view on YouTube, has to make their own “happy little accidents” to actually create anything. The singer has to sing, the baseball player has to swing and, well, you probably get the point by now.
As a market participant, no matter how long you spend researching an investment or tracking a chart for a trade, eventually, you have to pull the trigger. You have to shoot your shot (you miss all the ones you don’t take, anyway).
So what’s holding you back? Yeah … it’s fear.
Investing would be easy if it weren’t for this pain in the rear we know and love as fear. It might not be as terrifying as the spider-looking thing in the photo an inch or two above the words you’re reading right now, but losing money is scary. I mean, not scary enough to make you lose control of your bodily functions (usually) — it’s only money (hopefully of the discretionary variety) — but, certainly scary enough to get you to question if you’re doing the right thing with your hard-earned cash.
Here’s the thing, though: that fear can be your friend.
In fact, understanding it — even harnessing it — can be the difference between building the portfolio of your dreams through consistency and compounding or (gulp) never getting started at all.
Hat’s off to the fearless few
Before I dive into using fear to your advantage, check out how powerful ignoring it can be. Let’s take a super-quick stroll down memory lane … all the way back to 2012, when Facebook went public via an IPO (initial public offering) with a starting share price of $38. It didn’t take long to dip below $18 a share but, well, just look where the share price is today (7/5/23):
As you can see, early Facebook (now Meta) investors have been on a nice little ride over the last decade-plus. If you invested $10,000 at $38 a share back in 2012, your 263-share position would be worth more than $75,000 today.
It seems agonizingly easy in retrospect, but believe me, holding on to that position for the last decade-plus was anything but for those who actually did it. The main reason? You guessed it: fear. I mean, feel free to put yourself in the shoes of the early Facebook investor for a second. Let’s say you really believed in Zuck (founder and CEO Mark Zuckerburg), eagerly invested $10,000 in Facebook on IPO day and, not long after, watched in horror as those same shares shed nearly half their value. I don’t know about you, but I’d be reduced to a puddle on the floor … especially if it was my first major investment.
Those who let fear get the best of them, and I’m sure plenty of people did, sold their shares on the initial dip. If they didn’t sell then, plenty more surely did sometime between 2021 and late 2022, when the share price dropped from its all-time high (nearly $400) in September of ‘21 to less than $100 by Thanksgiving the following year.
There have been more than a few scary moments for Meta investors over the last 10 years, but, the ones who ignored the noise, believed in the story and held onto their shares have been rewarded handsomely for it.
Make fear your portfolio’s friend
Now that you know how important fear management is, you can get a better idea of its value as an investment tool. The market is going to get fearful from time to time. It’s been proven again and again for as long as the stock market has been a thing. It doesn’t matter how many nameless, faceless guys on the internet write blog posts encouraging the opposite, the market is going to react negatively to fear.
You, though, by taking advantage of the market’s propensity to overreact, don’t have to.
Instead of freaking out, use the market’s fear to scoop up shares of some of the world’s best companies when they’re on sale. Think of it as turning a negative into a positive. It’s super simple as a concept, but really hard to implement as a practice. Turns out, human psychology is a tough nut to crack.
Harken back to the Facebook analogy I used earlier in this post, though.
Know what would’ve been even better than buying $10,000 worth of stock when it hit the market at $38 a share? Buying $10,000 worth when once it plummeted to the $18 range. You’d be up twice as much.
You could buy a share for less than $100 less than a year ago. Now, shares of Meta are approaching $300. The company hasn’t really done anything other than lay a ton of people off to cut costs, yet the share price has almost tripled.
So what’s changed?
Sentiment.
A year ago, people were worried Meta was going to spend its way to irrelevancy through its enormous investment in the metaverse. Investors thought Tik Tok would destroy Instagram. Today, with the layoffs in the rear-view mirror, AI causing people to give the metaverse a second look (even if a bit reluctantly) and the Twitter-killer app Threads on the way, investing in Meta is cool again. Don’t take my word for it … just look at the share price.
The bottom line: make fear your friend. Use it to start building positions in companies you like, but maybe haven’t invested in because you thought the valuation was a bit rich. Also, as long as the reason you started investing in a company, to begin with, doesn’t drastically change course, use big dips like those created from fear (usually after bad earnings reports or lowered guidance) to add to your favorite positions.
Disclaimer: I’m a market participant, not a financial advisor. This is not financial advice.
