The price of long-term outperformance

Peter Lynch, the former Fidelity investment legend, once said: “Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” Warren Buffett was just as forthright: “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” Two principal problems are highlighted by these comments. First, investors are human and so revert in periods of stress to atavistic emotional and cognitive short-cuts rather than employing rational thought. Second, they are prone to two unavoidable behavioural biases – they follow the crowd and they do whatever they can to avoid the pain of loss. What both of these great investors understood and the rest of us need to keep reminding ourselves is that the volatility of the market is simply the price we pay for the long-term outperformance of shares. Read 10 things to tell yourself when you need to get a grip: (VIEW LINK)