Let me tell you a story:
There I was, fully armoured, from head to toe, making a few more stretches as I waited for my cue to step into the floor mat, designated for my first Taekwondo bout. I looked across the mat and I saw my opponent, taking a few more sips of water as he was given a pep talk from his coach and his teammate. Then, a well groomed man walked towards the centre of the mat and he gave a yell:
I gave a bow to my coach and jogged to the centre of the mat.
So, did my opponent.
Then, the well groomed man did the formalities and began our contest.
It was time to rumble. Both my opponent and I started off cautiously. We threw a few kicks, here and there, testing and assessing each other. Thirty seconds did go by. Both of us had nothing on our scoreboards. It was then, I faked an attack, deceiving my opponent of a bogus kick with just a quick shuffle and a loud yell.
To my surprise, my opponent fell for it as he panicky took two steps back. It was a bad move on his part. But, to my good fortune, I advanced quickly, gave him a Bruce Lee’s sidekick and sent him flying out of the floor mat. Boy, it felt so good and needless to say, the rest of the match is history.
I won that bout comfortably.
Two years later, I entered into a different Taekwondo tournament.
As usual, I waited for my turn, did my final stretch, gave a bow, and jogged right into the floor mat as I faced my next opponent.
The referee did his drill and started the contest. I began cautiously as usual, just throwing a few kicks to assess my opponent. Then, as time goes by, I decided to fake an attack just like what I did with my first opponent mentioned earlier.
My opponent acted panicky and took a few steps back himself.
I was convinced that he fell for my deception and I launched a roundhouse kick, aiming for his torso.
Concurrently, my opponent stepped right in, closed the gap between us, and he raised his foot and gave me an axe kick. He collected two points. I had nothing.
I was punked, countered by a better opponent who saw and knew what I aimed and tried to do all along.
At the end, I lost that bout.
So, what does my two Taekwondo bouts have to do with stock investing?
How are they helpful in dealing market fears and uncertainties?
Let me explain:
#1: The Typologies
First, there are three major characters in my stories above. My first opponent is a typology of how most people invest in the stock market. They are unprepared to face market uncertainties and hence, are fearful. My second opponent refers to how savvy investors will deal with market uncertainties and profit from them handsomely. As for myself, I’m a typology of stock market uncertainties as I was not a stationary target in a Taekwondo bout. So, in short,
a. My First Opponent – How Most Investors Invest
b. My Second Opponent – How Savvy Investors Invest
c. Myself – I Represent the Stock Market
#2: Retreating: Bad Move to Face a Market Crash
Most investors did what my first opponent did when I attacked.
When I launch an attack, I’ll have to move forward. My opponent retreated and as a result, offering me the space, the choices, and the momentum to follow up with more vicious attacks. Instead of another usual roundhouse kick, I will have options to use a sidekick or an axe kick or a 540 roundhouse kick to inflict more pain and damage to my opponent. Retreating may be intuitive but it has been a bad idea as it places my opponent in greater danger than before.
Likewise, when the market launches its attack and a great example is the recent market crash in March 2020 due to the COVID-19 pandemic, many investors did retreat as they feared the worst. They have panicked, sold off their investments and just stayed on the sidelines. They lost a chance to boost their wealth.
#3: Why Engaging is Better than Retreating?
Here is what my second opponent did when I attacked.
Once again, when I attack, I’ll move forward. Instead of retreating, he closed his gap between us by moving forward himself. This denied me any space or choice to follow up with any kinds of attack. Then, as we clinch, he lifts his foot to land himself an axe kick on my head. He scored 2 points and I was left frustrated.
All of these happened quickly within a matter of 3-5 seconds.
So, what got him the 2 points?
First, he is experienced enough to spot my decoy.
Second, he is mentally cool and prepared for what he will do if I attack.
Third, he engages instead of retreating, closing our distance from each other.
Fourth, he knew his target, which is my head, and he went for it.
Similarly, in a market crash, savvy investors will remain collected even when the whole world is crying foul and getting out. They are prepared for it. So, during a market crash, they recognised that P/E Ratios of fundamentally great stocks are reducing, just like how my second opponent closes up the distance between us. They have their preferred stocks in mind and invested in them at prices that are hugely discounted in the stock market.
Conclusion: Emotional Intelligence is Key to Investment Success
The above explains the psychological differences between a good exponent and an inexperienced exponent. For most, they do transcend to the investing world. The stock market is a battleground just like my Taekwondo bouts. Both will deal with the contestants’ ability to handle emotions.
When faced with an attack, do you retreat or will you move forward just like my second opponent to close our gap, denying me more chances to score points?
But I understand. Moving forward is counter intuitive. Retreating is natural. The whole act of closing the gap and launching a counter attack when faced with an attack requires a lot of practise, drill and tournament experiences. Otherwise, it is just head knowledge without real application in life combat.
With that, I’ll like to offer some pointers to face market fears and uncertainties:
a. Study how good investors face market crashes in the past.
b. Be expectant of market crashes, fears, and uncertainties at all times.
c. Decide what you will be doing when they happen.