Investing is a game of mistakes; the one who makes the fewest mistakes wins. In that sense, investing has more in common with soccer than one might initially think. And that’s exactly what made Johan Cruyff so uniquely suited to share his genius—with insights both on and off the field—with investors.
Last month, the unprecedented volatility meant that even the smallest mistakes had a major impact on returns. On top of that, periods of high volatility are exactly when most mistakes are made. This is because our normally rational brains turn into emotional roller coasters. People don’t mind risk—as long as it doesn’t cost them money. Unfortunately, in times of stress, a long-term investment horizon can shrink to less than a week.
The biggest mistake investors keep making is selling when prices fall. When there’s a sale at a department store, everyone wants to buy. But when stocks are 15 percent cheaper, people instinctively sell to salvage what they can. The result of this “buy high, sell low” instinct is that researchers have shown the average investor consistently underperforms the market index. Index investing may seem to solve that problem, but even index funds get caught up in the wave of selling.
Investors today are also encouraged to act based on laws and regulations. If a portfolio is down by 10 percent or more, a warning must be issued. Such a warning always feels like a call to action, even though the best decision at that point is often to do nothing.
What also doesn’t help in avoiding mistakes is the fact that the best and worst days in the market tend to occur very close to each other. The strongest up days usually happen during or shortly after periods of high volatility and declining markets. This pattern is quite consistent worldwide. Roughly 70 percent of the best days in the market occur within two weeks of one of the worst days. Those who exit the market after a bad day often miss the strongest rebound days. Missing the ten best days over a ten-year period can cut total returns in half. Panic selling during times of volatility is costly.
Those who do exit the market are then faced with the uncertainty of when to get back in. More money has likely been lost by people waiting to buy at the bottom than in all corrections combined—if only because the market has always recovered from every correction. No one can consistently time the bottom.
Waiting for the perfect entry price not only means missing the strongest rebound days, but also carries the risk that the market is significantly higher by the time the investor eventually reenters. That’s also because people tend to forget what truly matters. The value of companies is not determined by market volatility but by their capacity for innovation, profitability, and competitive position.
Every correction plants the seeds for the next bull market. Corrections drive down valuations—especially when underlying earnings capacity remains intact—resulting in better price-to-quality ratios. Companies become cheaper relative to their earnings potential, which sets the stage for higher future returns. Moreover, speculative investments often don’t survive a correction. Companies with weak fundamentals or high debt levels come under pressure, creating room for stronger players.
The same applies to the excessive use of leverage by investors. The market gets cleaned up, or as Warren Buffett puts it: money returns to its rightful owners. A correction is often also a response to market prices that have run too far ahead of fundamentals. The correction adjusts this excessive optimism and restores realistic expectations. Furthermore, every bull market climbs a “wall of worry.” This wall often forms a solid foundation for a new upward cycle.
Lastly, corrections trigger policy responses. Significant corrections often lead to supportive actions by central banks and governments. Interest rate cuts, stimulus measures, and liquidity injections serve as fuel for the bull market.
Corrections are part of the bull market, and the stocks that rose the most beforehand are often the ones that fall the hardest. However, it’s rare for market leadership to change during a bull market. Just three months ago, U.S. stocks—especially Big Tech—were praised to the skies, and now they’re being heavily criticized. Some investors even say they no longer want to invest in the United States.
For contrarian investors, these are particularly attractive signals to invest in U.S. stocks. The current U.S. interest rates show no signs of a funding crisis, and the dollar has returned to pre-election levels. Yet many flawed long-term conclusions are being drawn from the recent volatility. That’s nothing new—after every major correction, the system is wrongly called into question.
Thanks again to Johan Cruyff—you only see it when you get it.
Han Dieperink is Chief Investment Officer at Auréus Vermogensbeheer. Earlier in his career, he served as Chief Investment Officer at Rabobank and Schretlen & Co.