Whether it was worries about AI returns, the government shutdown, or some disappointing earnings reports, the drawdown is now at 4.1% for the $NASDAQ 100(NDX)$ and 2.4% for the $S&P 500(.SPX)$ . That’s not a big drop yet, but it’s been bigger for some stocks this week.
I’ve written many times about how I feel the market is overoptimistic about the returns of AI and the growth that’s currently only being felt by the top end of consumers.
We will likely see more volatility ahead, as indicated by weak results at restaurants and major layoffs across Corporate America.
We’ve been through drawdowns (a decline from the peak valuation) before, but it’s been a while since one lasted very long. If you’ve been investing for less than 15 years (now, I feel old), you’ve never been in a drawdown that lasted more than two years. But declines can take decades to reach new highs.
That’s why keeping your head during drawdowns is important. Avoiding speculation and major mistakes will allow you to take advantage of the market’s long-term trend, which is higher!
Here’s what we all need to keep in mind.
Take the Long-Term View
Asymmetric Investing is built on taking the long-term view. I’m focused on companies that can be disruptive over the next 10-20 years, not the companies that will beat estimates this quarter or those that fill a “story” trend in the market.
If you can think longer term than Wall Street, you’re a step ahead.
Avoid Panic Selling
If you need to sell, try to do it from a point of strength.
That house or college tuition payment looks daunting when the market is dropping 5% per week.
When the market drops, we want to be in a position of strength.
We want to be greedy when others are fearful.
If you can avoid being the one who panics at the bottom, you’ll find outsized returns.
Focus on Fundamentals and Value
Fundamentals matter more in a down market than in an up market.
When stocks are going up, stories matter.
When stocks are going down, cash flow, margins, and balance sheets matter.
A few weeks ago, I did a “State of the Portfolio” series where I showed the P/E ratio, EV/sales, net cash, free cash flow, and revenue growth of every company in the portfolio. And I marked each metric green (good), orange (questionable), and red (concerning).
A simple exercise like this can tell you where risks are that you may be overlooking.
It can also show opportunities you may want to jump on if they arise.
Stick to Your Frameworks
I have written down my frameworks for Asymmetric Investing. This is what I follow to keep my head in a turbulent market.
Understanding what your goals are and how you’re going to invest at the market top and as it drops will help you keep your head.
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