from "Beating the Street" by Peter Lynch
The key to making money in stocks is not to get scared out of them. This point cannot be overemphasized. Every year finds a spate of books on how to pick stocks or find the winning mutual fund. But all this good information is useless without the willpower. In dieting and in stocks, it is the gut and not the head that determines the results.
In the case of mutual funds, for which the investor isn't required to analyze companies or follow the market, it's often what you know that can hurt you. The person who never bothers to think about the economy, blithely ignores the condition of the market, and invests on a regular schedule is better off than the person who studies and tries to time his investments, getting into stocks when he feels confident and out when he feels queasy.
It's no accident that Mondays historically are the biggest down days in stocks and that Decembers are often losing months, when the annual tax-loss selling is combined with an extended holiday period during which millions of people have extra time to consider the fate of the world.
The best way not to get scared out of stocks is to buy them on a regular schedule, month in and month out, which is what many people are doing in the 401(k) retirement plans and in their investment clubs. It's no surprise that they've done better with this money than the money they move in and out of the market as they feel more and less confident.
The trouble with the Dr. Feelgood method of stockpicking is that people invariably feel better after the market gains 600 points and stocks are overvalued and worse after it drops 600 points and the bargains abound.
Stocks have provided their owners with gains of 11 percent a year, on average, whereas Treasury bills, bonds, and CDs have returned less than half that amount. In spite of all the great and minor calamities that have occurred in this century -- all the thousands of reasons that the world might be coming to an end -- owning stocks has continued to be twice as rewarding as owning bonds. Acting on this bit of information will be far more lucrative in the long run than acting on the opinion of 200 commentators and advisory services that are predicting the coming depression.
I'm convinced that it's the cultural memory of the 1929 Crash more than any other single factor that continues to keep millions of investors away from stocks and attracts them to bonds and to money-market accounts. Sixty years later, the Crash is still scaring people out of stocks, including people in my generation who weren't even born in 1929.
If this is a post-Crash trauma syndrome we suffer from, it's been very costly. All the people who've kept their money in bonds, money-market accounts, savings accounts or CDs to avoid being involved in another Crash have missed out on 60 years of stock-market gains and have suffered the ravages of inflation, which over time has done more damage to their wealth than another crash would have done, had they experienced one.
Because the famous Crash was followed by the Depression, we've learned to associate stock-market collapses with economic collapses, and we continue to believe that the former will lead to the latter. This misguided conviction persists in the public mind, even though we had an under publicized crash in 1972 that was almost as severe as the one in 1929 (stocks in wonderful companies such as Taco Bell declined from $15 to $1) and it didn't lead to an economic collapse, nor did the Great Correction of 1987.
A decline in stocks is not a surprising event, it's a recurring event -- as normal as frigid air in Minnesota. If you live in a cold climate, you expect freezing temperatures, so when your outdoor thermometer drops below zero, you don't think of this as the beginning of the next Ice Age. You put on your parka, throw salt on the walk, and remind yourself that by summertime it will be warm outside.