Butterflies in the stomach

When an investor invests in stocks of a Company, the underlying objectives are mainly regular income (i.e. through cash dividend) as well as capital appreciation (if their prices increase as time goes by).

It is very much natural to feel butterflies in our stomach when stock prices fall. It is our brain’s biological response to perceived threat or danger to trigger a fight-or-flight response. Now the question arises how to invest in stocks but to protect from these feelings of butterflies in our stomach.

When an investor buys a piece of land, he does not check plot prices on daily, weekly or monthly basis. He may check the prices after every couple of years to measure where his investment is leading to. How often do you check prices of the home you are living in? At least not on daily, weekly or monthly basis. The problem with stock investing is that you can see stock prices every second while stock market is open and trading is going on. Warren Buffett’s famous quote is “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”

Buy the business, not the stock

You therefore need to focus on the business you own (i.e. by way of holding stocks of a running Company) and not on its stock price movement around each day. The price movement in short run is not always due to changes in business case of the underlying company. The stock prices are reflection of demand and supply of that Company’s stocks in Stock Exchange.

The market can be unpredictable and no one (e.g. stock trader, equity analyst, research analyst, brokerage house etc) has crystal ball to predict future accurately. An investor should always understand that with the purchase of a stock he is involved not only in the success but also in the failure of the company.

A famous saying is: A bird sitting on a tree is never afraid of the branch breaking, because its trust is not on the branch but on its own wings. We can rephrase this famous quote as:

If your investment thesis and fundamentals have not changed, a fall in stock price might be an investment opportunity rather than a threat. Long-term success in wealth generation from stock market depends on the business performance of the Companies you own, not everyday price fluctuations. First and most important things is to stop tracking the stock prices frequently and spend this time on other productive activities in life.

An investor should always look at the long-term trends in Company’s earnings growth which should be consistently rising upward, and not at day-to-day price fluctuations. This is called Zooming out.

Dealing with the stress

If a single stock price drop is causing too much stress, you can consider diversifying investments (by investing in multiple stocks under investment portfolio) and adjusting your exposure in that particular stock. A well-balanced portfolio works as a cushion or shock absorber to the emotional response.

An investor should always stay informed but avoid panic. When you follow too much market noise (news, tips, weekly research reports etc), you simply amplify our emotions and stresses. You should separate noise from real change. You need to detach yourselves from daily price movements. When share price drop is due to sentiment across the market, economic factors or short-term news, it is most often temporary.

In conclusion, there is no such thing as a successful get-rich-quick scheme. Our stock investments — like babies — always take a certain amount of time to grow and compound. There are no shortcuts to success in the stock market. As with everything in life, success in the stock market takes time and requires dedicated efforts and considerable investments of knowledge and money.