Recent wild fluctuations in the stock market remind me of how investing is like surfing.
In the late 1960s, my mother loved to pack a picnic lunch, drive my younger brother and me to MainBeach, and spend the day sunbathing. At midday, she would dispatch one of us to Tacos Aqui for an icy soda and fries.
We liked the rides on the Boardwalk, especially the Wild Mouse. But the best rides were 100 yards away, in the waves, body surfing. We were little kids with no wetsuits, and we’d hang out in that cold water, waiting for the next big wave, until our teeth were chattering.
My mother’s instructions were: “When your brother’s lips turn blue, it’s time for both of you to come in.”
There were dangers out there. I once stepped on a wad of seaweed wrapped around a large fishhook that pierced halfway through my foot. Sometimes a wave would slam me into the sand or flip me into spin cycle. But it was worth the risk for the chance to ride a wave.
Warren Buffett is known as the world’s greatest investor because of his ability to step up and buy when others are panicking. Investments he made during the financial crisis of 2008 have been among his best. He says his philosophy is, “Be fearful when others are greedy, and greedy when others are fearful.”
Those who followed that advice when fear gripped the market during that crisis have enjoyed great returns. From the bottom on March 6, 2009, to the peak in May of this year, the Dow Jones Industrial Average nearly tripled in six years.
Another time of extreme fear was Black Monday: Oct. 19, 1987. I was a broker at a major firm in Southern California. Worries about a weak dollar sent the Dow plunging 508 points, or 22.6 percent, in one day.
The worst part of Black Monday was the next morning, when the Dow dropped another 200 points in the first two hours, so it was down 28 percent in less than a day and a half. I saw a fellow broker, who had steered many of his clients into risky strategies, break down sobbing in his secretary’s arms that Tuesday morning.
Investors who had the courage, foresight — and cash — to buy near the bottom in October 1987 rode a 1990s wave that lifted the Dow past 8,000 in November 1997, a gain of 400 percent in 10 years.
The most recent moment of extreme fear occurred last month, when the Dow plummeted more than 1,000 points — or 6.6 percent — in the first five minutes of trading on the morning of Aug. 24. The Dow had never in its 119-year history dropped more than 1,000 points in a day.
I don’t know if that plunge marked a bottom in stock prices. However, I know that investors who sell in fear usually regret it later. Those willing to swim against the tide and see opportunities amid the dangers have been rewarded in the long run.
To ride out turbulent times, hold enough cash to cover your living expenses for an extended time (depending on your age, job security and other factors). Keep more cash available in your investment portfolio so you can follow Buffett’s advice and buy when others are selling. Lastly, don’t buy on margin, using borrowed money — a strategy that can force you to sell at the wrong time.
Mark Rosenberg is a financial adviser with Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 831-439-9910 or mr********@fw*.com.
