The fight or flight response is one of the most fundamental to human nature. When faced with a threat, real or imagined, a cascade of hormones triggered by the nervous system encourages people to fight or run away. It’s an instinct that cannot be stopped.
But it can be controlled. Investors are one group of people who will fail if the fail to control this instinct. The market is a beast that cannot be fought–but you can’t run away from it, either. Instead, you need to learn to control your emotions.
For bullish investors, a bear market is a stressful period. Especially for investors who remember 2001, 2008, or the other crashes in recent history. Those crashes can destroy portfolios and end careers, and a few bad days–like we’ve seen at the end of this week–can cause a panic across the market. The problem is that this panic, when acted upon, just aggravates the situation.
In times of bear markets, it’s a good idea to step back and think a bit about the past. History gives perspective. Bear markets are stressful while they are happening, but they also indicate opportunity. That opportunity is only visible to people with a long-term time horizon.
To demonstrate this, take a look at this chart:
This is Coca-Cola (KO) from the middle of 2008 to the middle of 2009, one of the worst bear markets in American history. Here we see Coca-Cola plummet by almost 20% overnight, only to recover some of those losses slowly over the next three quarters. For investors holding KO in October 2008, the stress and panic must have been unimaginable.
Now let’s take a look at KO from the middle of 2008 to today:
What a different story. Not only has KO risen by nearly 100% since its all-time low, but its dividends have steadily increased and the stock split in 2012. Those 2008 worries are long history, half a decade later.
Plus, Coca-Cola has been steadily increasing its dividends, which are up almost 50% in the past five years. So investors who waited out the panic of 2008 have seen tremendous profits due to their patience and perseverance.
There is another parallel story in this chart. While everyone was panicking and selling off in late 2008, the smart, long-term investors saw the buying opportunity of a lifetime and snapped up KO at a heavy discount. Those that did have more than doubled their money in just 5 years.
Of course, back in late 2008 it looked like the end of the world. Serious talking heads on business news channels were talking about the apocalypse. Doom, chaos, and uncertainty were on the forefront of everyone’s minds. In that scenario, it is difficult to buy. There’s a psychological trap that bear markets bring: they trigger the fight or flight response, which is to run away from the market entirely.
Not everyone did that. The smart investors doubled down. And they got very rich as a result. There is serious money to be made in suppressing one’s instincts, especially fight or flight.