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3 ways to win during a market correction

Let’s give a quick rundown of some of the biggest concerns for investors at the moment (in no particular order):

  • Russia is going to war with Ukraine
  • Inflation at its highest level in 4 decades
  • Fed tightening monetary policy
  • Growth stocks are crashing
  • We are arguably the craziest housing market ever
  • Interest rates are finally starting to rise
  • Labor markets and supply chains are lacking
  • stock market crash
  • And we’re in a pandemic that’s been going on for two years

This isn’t an exhaustive list, but there’s a lot to worry about right now if I missed a few things.

I may try to go through this list to provide data and context and opinion on each variable here, but it’s not going to be very good because the only variable that matters – the future – is unknown.

And even if I had the ability to put you in the headlines in the future, you probably wouldn’t make much money in those headlines. No one could have predicted that the stock market would rise by more than 50% in 2020 and 2021, despite the onset of the worst pandemic in 100 years.

When the market turns turbulent, you really have 3 options as to what to do with your portfolio:

  • Do more
  • do less
  • Do not do anything

Trying harder and doing more usually leads to better results in many aspects of your life. Study hard and you can get better grades. Practice more and you can improve in games. Go to the gym regularly and you can transform your body.

Investing doesn’t necessarily work like this.

Sometimes the more you try and the more you do, the worse your results are. It’s counterintuitive but true.

Doing more is often even more harmful when it is done at the worst possible time.

There is a desire to be a hero when there are ups and downs in the market. There are those who want to choose the right hedge, nail down, sell rips to buy dips, and so on.

It seems so easy to see corrections and downsides but it is impossible to predict them in real time. When markets are going down, human nature takes the wheel while the basics are tied in the trunk.

And when human nature takes the wheel it becomes very easy to make mistakes. Minimizing mistakes is how you win during market corrections.

In his classic book, Winning the Loser’s Game, Charlie Ellis gives one of my all-time favorite investing analogies:

In expert tennis the final result is determined by the actions of the winner. Professional tennis players stroke the ball with laser-like accuracy through long and often exciting rallies until one player is able to push the ball out of reach or force the other player to make an error. . These brilliant players rarely make mistakes.

Amateur tennis is almost entirely different. The result is determined by the loser. This way. Brilliant shots, long and exciting rallies, and a seemingly miraculous recovery are few and far between. The ball is often hit into the net or out of bounds, and double faults on serve are not uncommon. Instead of adding power to our serve or trying to hit close to the line to win, we should focus on getting the ball back consistently. Rarely do amateurs beat their opponents, but instead beat themselves. In this game of tennis the winner gets more points because the opponent is losing even more points.

In matches played by professionals, about 80% of the points are won by a player hitting a brilliant shot. In amateur matches, about 80% of the points are lost by the player making the mistake.

The best tennis players in the world hit the winners while the rest of us hit it in the net.

The biggest difference between tennis and investing is that you will never make it on the same court as Roger Federer or Serena Williams but each investor plays on the same surface (the market).

I’m going to tell you a little secret – most professional investors would be better off taking an amateurish approach to investing. Yes, there are intelligent investors who can and do hit those winners but not on a consistent basis and this is certainly a group that is shrinking over time.

It’s better for the other 99% of us to avoid mistakes by making bone-heading moves at the wrong time.

These are some of the biggest mistakes investors make during corrections:

  • try to time the market
  • confusing your time horizon with someone else’s
  • Failed to stick to your investment plan
  • Failing to have an investment plan in the first place
  • try to beat the market
  • Paying attention to the stock market for a longer day than usual

I know it’s not the sexiest way to invest, but for most of the population it offers the highest chance of success.

I love Ellis’s book so much that I use another of his concepts when I give presentations. He says there are really only 3 ways to win the investing game, each tedious in its own way:

I’ve already talked about the problem with number one – working hard doesn’t lead to better results in the market and in fact it often makes your performance worse.

The problem with number two is that there will always be someone smarter than investing in the markets. There are hedge funds full of PhDs, rocket scientists and quants armed with the best data, technology and brains in the business.1

This leaves number three – to be more rational than the competition.

Being more rational requires the use of a long-term mindset. It requires patience, discipline and the ability to ignore short-term fluctuations in the market.

It is not easy but it is your best bet to avoid inevitable market corrections.

Further reading:
It is common

1And most of these funds still fail to beat an ordinary index fund.

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