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, that's
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 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 (and deal with them like
visiting relatives) 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.
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. We've actually had fewer major
storms than anticipated. The ones we've had were devastating,
but the rebuilding/preparation task ahead will be good for the
economy. 2. War in Iraq. There's always been a war of some kind,
somewhere. It's 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 can't seem to get out of his own
way. Who were the last ones that were loved? Didn't they have
wars? 4. Wall Street/Corporate scandals. Hardly new and never
economy busters. 5. Energy prices. I still don't 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 we'll really need those bad
boy drug companies then, won't we? 10. The Anniston/Pitt break
up, and neither the Yankees nor the Bosox in the World Series.
Now we're 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. I've 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 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. 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 portfolio's Working Capital.
But for now, relax and enjoy this correction. It's your
invitation to the fun and games of the next rally.
Steve Selengut
http://www.sancoservices.com
http://www.valuestockindex.com
Professional Portfolio Management since 1979
Author 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"
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