(Editor's Note: This was originally published on Real Money Oct. 15, 11:00 a.m.)
As an investor, I don't see the value in getting bearish on stocks or looking to short the market. Over time the market has gone up, both in nominal and real terms. It reflects the growth in the economy. Sure, there are going to be slow periods, even periods of recession or perhaps worse, but they resolve. The natural order of things is growth and the stock market reflects that.
Many people are preoccupied with market downturns. They're always looking for the next crash or when to go short. I believe that is a losing game. Warren Buffet is the second richest man in the world. However, he never built anything, created any new technology or made any new discoveries. Rather, he owns stocks -- stocks that he bought when others sold.
Most investors are fearful when the market goes down. They panic. Many times they sell right at the bottom on nothing else but pure emotion. Rationality is tossed out the window. On the other hand, I love market declines. I look forward to them. They give me an opportunity to buy great stocks or the market as a whole when it is on sale.
The weird thing about investor behavior is that it runs counter to how most people act when it comes to their own personal consumption. Here in the U.S. we literally invented the concept of discount shopping. Most people will not buy anything unless it is on sale. Indeed, one of the largest companies in the world -- Wal-Mart (WMT) - Get Walmart Inc. Report -- was built by catering to that very behavior pattern. Even during the holidays in December, people may shop to buy gifts for their family and friends, but the real shopping occurs after Christmas when everything goes on sale.
Yet when it comes to investing that behavior is turned upside down. People love to buy stocks when they are expensive and sell them on the cheap. How can you make money doing that?
In one of the stories Warren Buffet tells about his investment philosophy, he recounts the parable about "Mr. Market." Buffet says that Mr. Market comes knocking on your door with a basket of stocks that he offers to sell you at some price. The next day, or a week later, he might come back with that same basket of stocks at a much lower price, for no particular reason. Same basket, same stocks; he is just offering those stocks at a cheaper price than before.
That's when you should buy. These are the same companies with proven businesses that have shown long histories of profit. The market takes them down. Why do investors mark them down? Usually for no reason other than emotion.
Sure, from time to time there really is a fundamental reason to get out of a stock: a firm has legal problems; is being forced to declare bankruptcy; or is getting its lunch eaten by a competitor. Hey, listen, I bought Countrywide when it was collapsing during the financial crash. I now look like an idiot for doing that, but I also bought many other great companies such as Apple (AAPL) - Get Apple Inc. (AAPL) Report and Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report and did extremely well on those investments, completely offsetting my losses on Countrywide by a huge margin.
All I'm saying is, don't fear selloffs. Embrace them. Wait for these declines with excitement and anticipation because when they happen they are gifts. Train yourself to buy when others are selling and make sure to focus on quality companies. You will be amazed at how fast your investment portfolio will grow by following this advice.