Smart investors keep their cool.
That's the message of a recent memo from Howard Marks, chairman of the investment firm Oaktree Capital.
In a lengthy reflection on the challenges of investing, Marks wrote that last month's roller coaster in the global stock market was a result of investors succumbing to their own anxiety.
"Emotion is one of the investor's greatest enemies," Marks wrote in the memo, dated Sept. 9. "Fear makes it hard to remain optimistic about holdings whose prices are plummeting, just as envy makes it hard to refrain from buying the appreciating assets that everyone else is enjoying owning."
The sudden price swings that occurred in August came after investors got spooked by negative economic data out of China.
"In this case, when China's growth slowed, its currency depreciated and its market corrected, I think a lot of investors realized they don't know what the implications are for the economies of the U.S. and the world," Marks wrote. "It's important to remain moderate as to confidence, but instead it's usually the case that confidence -- like other emotions -- swings radically."
Global markets tumbled last month on what became known as "Black Monday," as Wall Street gulped down a toxic cocktail of financial volatility. Sure, China's stock market collapse was part of it. But so, too, were big losses on Europe's stock exchanges. And oil hitting a six-year low. And a natural correction of a bullish market on which prices have soared for half a decade. And the same built-in, nonzero amount of chaotic uncertainty that shapes any free market.
That confluence of factors leaves even seasoned investors feeling vulnerable, Marks wrote.
"Investors can usually keep their heads in the face of one negative," he wrote. "But when they face more than one simultaneously, they often lose their cool."
Which is understandable. After all, as prices plummet, it's hard not to do something.
Still, Marks wrote, "something about which I feel strongly is that it's not the things you buy and sell that make you money; it's the things you hold."