Volatility is not risk. Risk is the permanent loss of capital.
When market drops 20%, that is volatility, not risk. The risk only materializes if you sell at the bottom and lock in the loss.
If you hold good companies through the volatility, you'll be fine. In fact, volatility creates opportunity for those with emotional control to buy at lower prices. Never worry about volatility.The real risk in investing is not in volatility.
- It is buying a bad business at any price.
- It is overpaying even for a good business.
- It is using borrowed money that you might need to repay at the worst possible time.
- It is letting fear or greed make your decisions for you.
Focus on what you can control.
What you can't control
- You can't control whether the market goes up or down tomorrow.
- You can't control whether we enter a recession next year.
- You can't control what other investors do, but you can control several critical things.
What you can control
- You can control which companies you invest in. Choose businesses you understand. With strong competitive advantages, run by honest and capable management, selling at reasonable prices.
- You can control how much you pay. Never overpay, even for a great business.
- You can control your time horizon. Give your investments time to compound.
- You can control your emotions. This is the hardest and most important thing you can control. When you focus on what you can control, you worry less about what you can't.
The market will do what it does. Your job is to make smart decisions and stick with them.
Keep a journal of your investment decisions.
Write down why you are buying a stock, what price you are paying, what you expect the business to do over the next 5 to 10 years. Then periodically review your journal.
This practice does several things.
- First, it forces you to think clearly about your decisions before making them. You can't write I am buying because everyone says it is going up. You have to articulate a real investment thesis.
- When you look back at your decisions, you'll see patterns. Maybe you always buy when you are feeling euphoric and the market is high. Maybe you always sell when you are scared and the market is low. Recognizing these patterns is the first step to changing them.
- Third, it helps you learn from both successes and failures. When an investment works out, you can look back and see what you got right. When it doesn't, you can see what you missed. Over time, you'll become a better investor by learning from your own experience.
