By James B. Stewart
It’s Thursday morning, March 19 — four weeks into the coronavirus crash of 2020. The Dow Jones industrial average has opened down another 700 points, after plunging below 20,000 a day before. It’s down 30 percent in a month, the steepest drop ever, even worse than during the Great Depression.
The fall has been nauseating. Yet I know this is a time to be buying stocks based on rules I’ve developed over decades of investing. But in order to do that, I have to log on to my brokerage account. When I do, the first number I’ll see is the current market value of my portfolio.
Isolated at a farmhouse in rural New York, surrounded by wilderness, I haven’t looked in days. I don’t want to look now.
I decide I’d better check the weather forecast instead. And then there’s email to catch up on. An hour later, I’ve done nothing.
I’m paralyzed.
I’ve owned stocks for nearly 40 years. I’ve lived through, survived and even prospered through four crashes.
So I should be prepared. Yet, looking back at the last few weeks, I recognize that I’ve violated most of my time-tested rules. Whipsawed between optimism and despair as the bad news mounted and my daily life was upended, I’ve let emotions influence my decisions. I’m doing it again this morning.
An unfathomable fall
I first bought a stock mutual fund during the summer of 1982, as soon as I’d saved enough money to invest. My father, a Cadillac-driving sales manager for NBC’s local TV and radio affiliates, had been an avid believer in the stock market, and he’d drummed his faith into me.
It turned out that 1982 was a great year to buy, not that I realized it at the time. For years, I enjoyed the positive reinforcement of a steadily rising market. I loved looking up my mutual fund in the newspaper stock tables. Over the next five years the market tripled.
On Oct. 19, 1987, I was visiting my brother, who was spending a semester in France. When I left my hotel in Strasbourg early the next morning, I noticed the front pages on newsstands carried banner headlines reporting the Dow had dropped “23.” I wondered why the American market was front-page news in France. I looked more closely and saw the 23 preceded a percentage symbol. The Dow had dropped an unfathomable 508 points in one day. On a percentage basis, it was the stock market’s worst day ever.
I felt a powerful urge to salvage what was left of my modest savings by selling. But I was far away and had no choice but to hold.
Once I was back in the United States, the market seemed to stabilize. But volatility soon returned. In one of those downdrafts, I panicked and sold my entire fund.
By September 1989, the market had recovered all its losses. I watched from the sidelines, waiting in vain for a good time to get back in.
I vowed to never again trade in a panic. I made a rule — never sell on a down day — and a corollary: Never buy on an up day.
That served me well over the next decade’s record bull market, fueled by the tech boom. Times were even headier than during the 1980s. I often overheard personal trainers at the gym boasting about their favorite tech stocks.
The notion of diversification was largely unknown to me. In early 2000, when the tech bubble burst and the next crash came, I was fully invested and stayed that way. I watched as the value of my investments shriveled. I stopped looking at stock tables, which at least provided some psychological comfort. I dropped my monthly paper statements into the trash unopened.
But at least I adhered to my 1987 principle: I did not sell.
In the wake of the two-year bear market, I refined my strategy. I figured that if I bought every time the market average declined by 10 percent from its previous high — the standard definition of a correction — and then bought some more after each subsequent decline of 10 percent, then I’d never be buying at the top of the cycle.
I didn’t think of this as market timing, since I made no prediction where the market was headed. My strategy was a variation of the now-widespread practice of portfolio rebalancing — selling some asset classes and buying others to maintain a steady allocation.
I put this system into practice during the 2008 financial crisis. I recall shocked reactions that October when — with the market plunging and others boasting that they’d had the foresight to get out — I said I was buying.
My timing was hardly perfect. The market fell by 10 percent on five occasions — so I had plenty of opportunities to add to my stock positions. The last came in March 2009. In hindsight, the first of those 10 percent declines was a foolish time to have been buying, given that the market went down another 40 percent. But I reaped the gains even on those early purchases during the record-setting bull market that ended this month. Back in 2009, I didn’t have to worry about getting back into the market. I was already there.
What’s another virus scare?
There have been only five 10 percent corrections since then, and each was a buying opportunity for me. None was followed by a second 10 percent decline. The last of these corrections came at the end of 2018. As cash built up in my account, I wondered when, if ever, I’d get another such opportunity. I grew impatient. On Feb. 19, the S&P 500 closed at a record high. No one seemed to see a bear market or recession on the horizon, even as stock multiples teetered at record highs and a strange virus began to spread.
Until a week later.
Stocks fell, slowly at first, then gaining steam. By Feb. 25 the S&P 500 had dropped 7.6 percent from its peak.
From a financial standpoint, I wasn’t worried about the virus. Infections were leveling off in China. There were a few cases in the United States, most in a single nursing home in Washington State. Everyone was saying we had better medical care, better air quality and more effective means to prevent its spread than China. As an investor, I’d lived through many virus scares — SARS, MERS, swine flu, Ebola — and their ravages had no discernible impact on American stocks. Even the devastating AIDS epidemic had little effect on the broader economy or booming market.
So I bought stock (a broad-based index fund) on Feb. 25, jumping the gun on my own 10 percent buying target. My pent-up eagerness and optimism overwhelmed my disciplined strategy. I didn’t make a conscious decision to violate it. I didn’t even think about it in my haste to take advantage of what I assumed would be a fleeting opportunity.
Stocks dropped a little more the next day. Then, on Feb. 27, the S&P plunged nearly 5 percent. Now the market was officially in a correction, its fastest ever, down 12 percent from the peak the prior week. The coronavirus had spread globally, including to the United States.
I realized I should have waited. I felt foolish and guilty for violating my rules. I vowed not to do it again.
The biggest drop since Black Monday
But how smart I felt the next Monday. The S&P soared nearly 5 percent, amid rumors the Federal Reserve was about to cut interest rates.
The high was short-lived. By the end of the week, the S&P had erased Monday’s gains. By now I was worried, too, but I’m not an infectious disease expert. I figured stocks had priced in the risks. What I did know was that they were now deep into a correction, and so I bought more.
My buying may have been premature the first time, but now I was back on track, sticking to my playbook. At a time of soaring uncertainty on so many fronts, I felt like I was taking charge of my destiny.
That was the last time that buying stocks felt good, like I was pouncing on a fleeting opportunity. It soon became a source of profound anxiety.
Over the first weekend in March, headlines were all about the explosive spread of the virus in Italy. Photos of deserted piazzas drove home the gravity of the situation. What had seemed a distant threat now seemed close to home.
If that weren’t bad enough, Russia and Saudi Arabia decided to launch an oil price war just as demand was collapsing. Oil prices plummeted, dragging down the entire energy sector.
I expected it would be a bad Monday in the markets, but it was even worse. Circuit breakers kicked in to halt chaotic trading. The S&P closed down that day by 7 percent, the biggest drop since Black Monday in 1987.
I summoned the nerve to look at my brokerage account. I was shocked: The stock portion was down far more than the broad U.S. market averages. My international stock index fund was down 20 percent from its February peak, and the emerging markets fund had lost a quarter of its value.
I thought back to my experience 33 years earlier, when I’d panicked at the headlines in Strasbourg. I tried to remind myself that short-term volatility aside, the long-term trajectory of the market has always been up. When the market goes down, it’s time to think about buying more stocks — a time that came much sooner than I’d hoped or expected.
On Thursday, March 12, after President Trump banned most air travel between the United States and continental Europe, and after economies around the world started shutting down, the carnage in the stock market was even worse than Monday. The S&P dropped 10 percent, leaving it 27 percent below its peak a few weeks earlier.
According to my own rules, it was time to buy.
I hardly noticed. I was busy canceling a planned vacation the next week to the Virgin Islands. I began pondering the prospect of my own isolation, something that even a few days earlier had seemed unthinkable.
Worse, a friend in Spain, a healthy 40-year-old I had just visited in November, had fallen seriously ill with the virus. He was in a coma in a Madrid hospital.
I was worried about the spread of the disease. I wasn’t thinking about the stock market or my rapidly declining net worth.
Record-setting volatility
My strategy for trading isn’t meant to be rigid, only to be rational. It doesn’t matter if I miss a percentage point or two here or there, or if my timing is a little off, or if more important matters take precedence — as they have now. Two more friends told me they have the virus. Still, during the following days, when I pondered the rush of events during some long walks along a country road, I recognized I was running out of excuses for inaction. I knew I should be buying again, with the S&P remaining well below my 20 percent target. But trading was more volatile than anything I’d ever witnessed. The S&P logged a record seven straight days of swings of 4 percent or more.
That Friday, March 13, stock markets staged a late-afternoon rally as Mr. Trump promised new measures to contain the virus and shore up the economy. The S&P 500 closed almost exactly 20 percent below its peak. Still I did nothing.
It was just as well. On Monday, the market collapsed, erasing all of Friday’s gains. The Dow fell below the 20,000 milestone for the first time in three years. Markets were now down 30 percent. It was time for me to buy.
aving skipped the 20 percent buying “opportunity,” I knew it was time to step up. But I wasn’t going to do it on a day the markets had been in free fall. And in any event, I was back to avoiding my brokerage’s website.
The next day the stock market jumped higher. I felt a strong temptation to buy, gripped by the notion that the worst might be over. I worried I was missing the bottom by again failing to act on my strategy. But the 30 percent window had closed, and I reminded myself that my rule is never to buy on an up day.
The next day brought what seemed like good news: New infections in China had dropped to zero. Even so, that morning markets sank, again triggering my 30 percent buying target. This time I was determined to act.
And yet I dawdled. I checked the news, the weather, my emails. I told myself this was absurd. Whether I looked or not, my portfolio value was what it was.
So I looked. It was bad, but not nearly the shock of the last time (perhaps because percentage declines now translated to lower dollar amounts). I still had ample cash on hand as interest and dividends had accumulated over recent years.
So I stepped in and bought.
I won’t say I felt euphoric, but I felt better than I had in weeks, at least about my personal finances. I’d mustered the courage to face the truth, however grim. I’d acted according to a plan. I had more cash if needed for the next 10 percent decline.
My renewed confidence survived the next downdraft, which came the very next day.
‘Ashamed, foolish, like you screwed up’
This week I described my recent investing struggles to Frank Murtha, a managing partner of the consulting firm MarketPysch and an expert in behavioral finance. He said nothing I told him was unusual, even among seasoned investors.
My reluctance to look at my portfolio was common, he said. “Watching yourself have less money is painful,” he said. “It’s not just that you’re poorer. You also feel ashamed, foolish, like you screwed up. One of the toughest things is to separate your money from your ego and identity.”
He gave me credit for gathering the courage to face reality and then to buy. “Nothing relieves anxiety more than taking action,” he said. “You can take small actions that address the emotional need to do something without putting your finances at undue risk.”
Stocks are one of the few assets that psychologically become harder to buy as they become cheaper. “Every decision to buy is met with negative reinforcement,” Mr. Murtha said. Even he missed the great buying opportunity in March 2009. “I was too scared,” he said.
At least I didn’t commit what Mr. Murtha considers the most serious error, which is to sell into a steep decline. “That’s where people really get hurt,” he said. “Once you’re out, the emotional leverage works against you. Either the market drops further, which confirms your fear. Or it goes up, and you don’t want to buy after you just sold. Then it gets further and further away from you. People don’t realize how hard it is to get back in.”
The market soared. I felt no elation.
Nothing I experienced in the past prepared me for the speed of this market crash. The decline after stocks peaked in March 2000 lasted until October 2002 — two and a half years. The most recent bear market, which started in 2007, lasted 17 months. Nobody knows how long this bear market will last.
I take heart from this: During that previous bear market, the S&P was never down more than 50 percent from its 2007 peak. Even in the Great Depression, the worst bear market ever, the S&P dropped 86 percent. Small comfort, perhaps, but it never went to zero. And after those steep drops, the market not only recovered, but eventually went on to record highs.
This week brought some good news. My friend in Spain emerged from his coma. Doctors say his recovery will be slow, but they’re optimistic.
On Tuesday the market soared, followed by two more days of gains. This time I felt no elation. Some of the biggest rallies have come in the middle of the worst bear markets.
My next target is when the S&P falls 40 percent from its peak. I may be buying again soon.
James B. Stewart is a columnist at The Times and the author of nine books, most recently "Deep State: Trump, the FBI and the Rule of Law.". He won the 1988 Pulitzer Prize for explanatory journalism, and is a professor of business journalism at Columbia University.
Source: The New York Times