Recently, CNBC's Jim Cramer advised his viewers to pull out from the market all funds they will need in the next five years. From our point of view, as we discussed here, this is how investors should be positioned at all times! As the market is subject to wild swings, you can't rely on the market to offer you good prices in the short-term!
But the fact that Cramer recommends pulling out of stocks now, after the market has dropped, illustrates the fundamental difference between the mainstream finance industry and value investors. To value investors, stocks have become more attractive. While to those who pay little attention to financial statements in making their decisions, stock declines make stocks less attractive. Such investors are prone to psychological bias: when things are going well, they think the good times will never end; when things are going badly, they think the end of the world is near.
As an example, here is Jim Cramer discussing Bear Sterns 6 days before it went down:
If you understand what you're buying (i.e. the net assets and earnings power) in the stock market in the same way as you do when you make private transactions, you will feel comfortable riding out economic storms and will reap the rewards by buying low and selling high.