During every correction, I encourage investors to avoid the destructive inertia that results from trying to determine: "How low can we go?" and/or "How long will this last?" Investors who add to their portfolios during downturns invariably experience higher values during the next advance. Yes, Virginia, just as certainly as there is a Santa Claus, there is another market advance in our future. And despite a still much too high DJIA, we are in the third month of a correction. (A fourth month if you own income securities.)
Corrections are part of the normal "shock market" menu, and can be brought about by either bad news or good news. (Yes, that's what I meant to say.) Investors always over-analyze when prices become weak and lose their common sense when prices are high, thus perpetuating the "buy high, sell low" Wall Street line dance. Waiting for the perfect moment to jump into a falling market is as foolish a strategy as taking losses on investment grade companies and holding cash.
Repetition is good for the brain's CPU, so forgive me for reinforcing what I've said in the face of every correction since 1979... if you don't love corrections, you really don't understand the financial markets. Don't be insulted, it seems as though very few financial professionals want you to see it this way and, in fact, Institutional Wall Street loves it when individual investors panic in the face of uncertainty. Psstt, uncertainty is the regulation playing field for investors, and hindsight isn't welcome in the stadium.
A closer examination of the news that's fit to print (but isn't printed often enough) should make you more confident about the years ahead, whatever your politics. There is still plenty of good news, but neither the media nor the presidential hopefuls pay much attention to it: (1) Employment, jobs, and unemployment numbers are good. (2) Manufacturing numbers are strong. (3) The inflation rate is historically low. (4) Interest rates are closer to historical lows than to hysterical highs. (5) Durable goods orders are fine. (6) Corporate earnings reports have been strong. (7) Corporate dividend payouts have not been cut. (8) Our economy is still the biggest and strongest in the world, in spite of government efforts to prevent that from continuing. (9) We are in our second consecutive mild hurricane season, so far.
The bad news isn't all that bad either, pretty much the same ole stuff: (1) There's always been a war of some kind, particularly in the Middle East. (2) Energy prices are high, but I still don't see any gas lines, or any new exploration or refining capacity in North America. More than half the cars you see are SUV gas-guzzlers. (3) Trade deficits, and jobs leaving the country are really not news; they are the result of misguided tax and tariff policies. (4) High consumer debt. New? Not. (5) The terrorism threat has been a major serious problem for the past how many years? We're trying to deal with it. (6) The federal regulatory agencies probably do more damage to the economy than everything else combined. (7) Social Security, the IRC, and health care are still the major problems we face and ignore.
Clearly, there are no new economic problems to be overly concerned about. And for now, we simply have to deal with the opportunities at hand. Low, but increasing, interest rates force fixed income prices down and yields up... Opportunity One! Economic good news encourages higher rates to reduce inflationary pressures causing equity prices to trend downward... Opportunity Two! These forces of good are intersecting with the Market Cycle, something Wall Street tries to ignore and the media constantly misunderstands. Markets move in both directions, it's their thing, just like women changing their minds... Opportunities One and Two, squared!
There is an Investment Mindset Solution for the problems that most people have dealing with corrections, and rallies too, for that matter. I've never understood why "yard sale prices" here are so scary. Prices of high quality securities always seem to bounce back eventually. And there need be no rush for this to happen...
In recent years, Wall Street and the media have turned the process of investing into a competitive event of Olympic proportions and stature. What was once a long term (a year is not long term), goal directed activity, has become a series of monthly and quarterly sprints. The direction of the market isn't nearly as important as the actions we take in anticipation of the next change in direction. Performance evaluation needs to be rethunk (sic) in terms of cycles!
The problems, and the solutions, boil down to focus, understanding, and retraining. You need to focus on the purposes of the securities in the portfolio. You need to understand and accept the normal behavior of your securities in the face of different environmental conditions. You need to overcome your obsession with calendar period Market Value analysis, and embrace a more manageable asset allocation approach that centers on your portfolio's Working Capital. You need to elect new people who know how to connect the economic dots, and who remember that "the business of America is business".
But for now, relax and enjoy this correction. It's your invitation to the fun and games of the next rally, when you will see that correction is spelled o-p-p-o-r-t-u-n-i-t-y.
Note: The 2nd Edition of "Brainwashing" is coming this fall.
Professional Portfolio Management since 1979Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"