Peter Lynch: More money is lost anticipating market corrections

This is a very important quote from one of the world’s most successful investors – Peter Lynch – who is also the author of the popular book ‘One Up On Wall Street’.

The quote highlights a very common mistake.

Peter Lynch says, “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

Let us try to understand the quote in more detail.

When people are invested in stocks or mutual funds – they are constantly in fear of a market correction or crash. After all, who likes to see the value of their hard-earned investments go down? This makes them anticipate market movements – turning them more into ‘speculators’ than ‘investors’.

Wouldn’t it be great if you could buy just before the market is about to rise. And sell just before the market is about to fall? This could make you rich very quickly.

It could, but unfortunately it does not happen. Even the most successful investors haven’t been able to accurately time the market.

Timing the market is definitely possible, and is a skill that does come with experience. But trying to accurately time the market and trying to do it frequently – will result in loss of money.

The reason is simple – the market can fall much more than you think it can. And the market could also rise much more than you think it could. It will also end up surprising (and shocking) on both sides.

Recent Example: You invest 10,000 in a mutual fund in June 2022, when the market is falling. Within a month, the market has gone up quite a lot and you see gains of 10%. Your 10k investment has become 11k in super-quick time.

Business channels are saying the market is ‘overbought’ and there could be a correction. Wouldn’t it be great if you could sell your mutual funds now, keep the 10% profit and buy it again when the market falls?

You sell. And it makes you happy to see the market has actually started showing signs of falling. There is a 2-3% fall. You wait for it to fall a little bit more. But the market begins to rise and this time the rise is even faster. The market goes up another 10%.

Your 10k should have been 12k if you did nothing. But all you have is cash lying in your savings bank account. Now your mind begins to ask a different set of questions – What if the market does not fall? What if it continues to rise higher? Is the opportunity missed?

In such circumstances, most people end up doing one of the following:

  1. Buy the next small correction – which is more than the price they previously sold.
  2. Or find a way to spend the money on something.

Remember this – When a correction or crash is ‘anticipated’ it usually does not come. ‘Anticipated corrections’ get delayed. And crashes come either when there is extreme optimism in the market or when there is a sudden global event which cannot be predicted (like Covid).

I’ve known investors who have managed to build portfolios of high-quality companies, only to anticipate a market correction, sell their stocks and then struggle to rebuild their portfolio back to how it was.

Even in the 2020 market crash, those who tried to sell and buy lower – did not manage to buy lower, because there was too much fear at the bottom. Only after a bottom is formed do you get to know it was a bottom. But at that point in a falling market, it always feels like it could fall much more.

When the upward journey eventually started, it was fast. Most did not get an opportunity to buy – because the prices on the previous day felt much cheaper and they ended up waiting for those prices.

Simple advice: If you are a long term investor in a country which has immense potential for growth (like India). Stick to your equity investments. If there is a big fall, buy more. Learn to manage your risks, keep an emergency fund and sell only if you need money.

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