Rule #1 Finance Blog

With Investor Phil Town

How to Deal With a Stock Market Drop

When there’s a stock market drop, what do Rule #1 investors do?

Stock market trends create fluctuations. The market goes from an emotional status of exuberance and excitement with an overheated market environment, to the exact opposite. The opposite emotion is fear, everything is horrible, everybody’s unemployed, and the sun is never going to come up tomorrow. That’s a stock market crash.

Stock Market Trends: Warren Buffett and Coca-Cola

Here’s an example from Buffett’s portfolio…

Coca-Cola got to be ridiculously priced in the late 1990s and pretty much everybody knew it. Warren Buffett had about a 10% ownership of Coca-Cola at the time. Later on, the stock crashed 50%, and he was asked in one of his meetings why he didn’t sell it. Buffett basically said, “Well, because I’m not nimble. Not because you shouldn’t sell it.”

He would have crashed the stock all by himself if he sold it. He didn’t respond the way a lot of people thought he would if you “never sell.”

He didn’t say, “We would never sell.” He said, “We didn’t get out even, even though we knew it was over, because we couldn’t.”

But, you and I can. We can get out if we need to.

Let’s start with a couple of basics that are fundamental to Rule #1 Investing and learn the 4Ms to Rule #1 investing by clicking here.

What should you do during a market drop? Here are the basic things you should be doing.

1) Be Patient in Cash

You can’t do the kind of investing I do and that I want you to learn how to do, unless you’re okay with sitting in cash. You need to be able to be patient.

Sitting in cash means keeping money in your money market account, or in short term bonds. Something where you can get your hands on it if you need to.

You have to be willing to do that for a period of time while you’re waiting for these fluctuations in the stock market to come along.

This is where the average person can jump over 6-inch bars, because the market is going to give you those 6-inch jumps once every 5 or 6 or 7 years. Sometimes it happens more often.

2) Be Ready to Load Up When it Happens

Second, when it happens, you’ve learned enough about a few companies that you can load up the truck.

This means that you’ve researched and found some wonderful companies that are going to go up when the market comes back. You buy them and get a great deal on them.

3) When the Market Goes to the Other Extreme Be Ready to Get Out

Third, when the market goes to the other extreme, which is where it’s been lately, be prepared to exit and go back to cash.

You have to be ready to sit there for 3 years while it continues to go up, because you don’t have a crystal ball and you don’t know when it will drop. All you know is that it IS going to drop.

4) Don’t Be Greedy

This is where these big rates of return come from.

Obviously, fund managers can’t do this, they can’t sit in cash for a year. These are the things we can do that they can’t do.

It starts to make you think, “Well, that means there’s going to be big chunks of time where I’m really not doing anything.”

During the time between, find the companies that you know are wonderful. Do your research. Then, when the stock market drops, you’ll be ready.

Want to know where to start? Download my free 4Ms to Successful Investing and learn everything it takes to research a company. Be ready when there’s a stock market drop.

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P.S. Here are a few other posts about the market you should check out:

Are We Headed for a Stock Market Crash in 2018?

Famous Quotes by Warren Buffett

The Best Way to Invest Money

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Phil Town is an investment advisor, hedge fund manager, 3x NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.