Investors will find that markets in freefall are more demanding. Upon turning red, they demand patience, precision, and perseverance. So, it forces investors to become more discerning, participate with caution, and overcome behavioural biases.
When price movements become unreliable indicators, telling winners and losers apart is challenging. We are tuned to judge the merit of decisions based on their outcomes. The markets signal the immediate worth of decisions. Often, sentiment and flows weigh on the present. Instead, if we focus on outcomes that are in the future rather than the present, we create wealth.
A beaten-down stock may either be a winning opportunity or at risk of becoming a long-term nonperformer. Investors tend to hold on to beaten stocks hoping that they will recover. After all, a notional loss is quite different from a realised one. In this market, blindly holding onto beaten-down stocks can destroy wealth.
Valuations have often been a reliable way of separating the winners from the losers in the long run. If a fallen stock is still considered overvalued, making tough decisions to weed out expensive ideas is the need of the hour.
Staying invested in expensive stocks means that one is willing to allocate time and money to this decision. Overvalued stocks may fully recover only after a few years. Are you willing to wait that long?