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.
Corrections are part of the normal "shock
market" menu, and can be brought about by either bad news or good
news. (Yes, thatís what I meant to say.) Investors always over-analyze when
prices are 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 brainís CPU, so forgive
me for reinforcing what Iíve said in the face of every correction since
1979... if you donít love corrections (and deal with them like visiting
relatives) you really donít understand the financial markets. Donít 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 isnít welcome
in the stadium.
A closer examination of the news thatís fit to
print (but isnít printed often enough) should make you more confident about
the years ahead, whatever your politics.
The good news is very, very good: 1. Employment,
jobs, and unemployment numbers are as good or better than they have been in
years. 2. Manufacturing numbers are stronger and trending upward. 3. The
"core" inflation rate is historically low. 4. Interest rates are also
historically low. 5. Durable goods orders are trending upward. 6. Corporate
earnings reports have been strong. 7. Corporate dividend payouts have been
increasing. 8. Equities, as an Asset Class, are considered the most fairly
valued, when compared with Real Estate, Fixed Income, and Commodities. 9.
Income Tax Rates are at low historical levels, particularly with regard to
investment income. 10. Gross domestic product is growing.
The bad news isn't all that bad, pretty much the
same ole stuff: 1. Hurricane Damage. Weíve actually had fewer major storms
than anticipated. The ones weíve had were devastating, but the
rebuilding/preparation task ahead will be good for the economy. 2. War in
Iraq. Thereís always been a war of some kind, somewhere. Itís bad, but only
the battlefield has changed... and war has also always been good for the
economy. 3. Politics. We have an unpopular President who canít seem to get
out of his own way. Who were the last ones that were loved? Didnít they
have wars? 4. Wall Street/Corporate scandals. Hardly new and never economy
busters. 5. Energy prices. I still donít see gas lines, and maybe somebody
will push for added refining capacity. 6. Trade deficits. News would be
giving foreigners more money so that they could buy more of our products.
7. High consumer debt. New? Not. 8. The terrorism threat. A major serious
problem for the past how many years? The federal regulatory agencies
probably do more damage to the economy. 9. The Avian Flu pandemic? Maybe,
but not yet, and weíll really need those bad boy drug companies then, wonít
we? 10. The Anniston/Pitt break up, and neither the Yankees nor the Bosox
in the World Series. Now weíre talking!
Clearly, there are no new (economic) problems to be
overly concerned about. And for now, we simply (and I mean 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 dark side of calendar year mentality Wall Street,
causing premature tax loss selling and portfolio Window Dressing...
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. Iíve never understood why "yard sale prices" here are so
scary. What if you cut off a finger each time you get a splinter? Wounds
heal, and so do the prices of high quality securities.
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 isnít 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. It would be impossible to cover each
of these issues here, but here are a few teasers. 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 switch to a more manageable asset
allocation approach that centers on your portfolioís Working Capital.
But for now, relax and enjoy this correction. Itís
your invitation to the fun and games of the next rally.