A correction is a beautiful thing, simply the flip side of a
rally, big or small. Theoretically, even technically I'm told,
corrections adjust equity prices to their actual value or
"support levels." In reality, it's much easier than that. Prices
go down because of speculator reactions to expectations of news,
speculator reactions to actual news, and investor profit taking.
The two former "becauses" are more potent than ever before
because there is more "self directed" money out there than ever
before. And therein lies the core of correctional beauty! Mutual
Fund unit holders rarely take profits but often take losses.
Opportunities abound!
Here's a list of ten things to do and/or to think about doing
during corrections of any magnitude:
1. Your present Asset Allocation should have been tuned in to
your goals and objectives. Resist the urge to decrease your
Equity allocation because you expect a further fall in stock
prices. That would be an attempt to time the market, which is
(rather obviously) impossible. Proper Asset Allocation has
nothing to do with market expectations.
2. Take a look at the past. There has never been a correction
that has not proven to be a buying opportunity, so start
collecting a diverse group of high quality, dividend paying,
NYSE companies as they move lower in price. I start shopping at
20% below the 52-week high water mark, and the shelves are full.
3. Don't hoard that "smart cash" you accumulated during the
last rally, and don't look back and get yourself agitated
because you might buy some issues too soon. There are no crystal
balls, and no place for hindsight in an investment strategy.
4. Take a look at the future. Nope, you can't tell when the
rally will come or how long it will last. If you are buying
quality equities now (as you certainly could be) you will be
able to love the rally even more than you did the last time...
as you take yet another round of profits. Smiles broaden with
each new realized gain, especially when most people are still head
scratchin'.
5. As (or if) the correction continues, buy more slowly as
opposed to more quickly, and establish new positions
incompletely. Hope for a short and steep decline, but prepare
for a long one. There's more to Shop at The Gap than meets the
eye.
6. Your understanding and use of the Smart Cash concept has
proven the wisdom of The Investor's Creed. You should be out of
cash while the market is still correcting. [It gets less and
less scary each time.] As long your cash flow continues
unabated, the change in market value is merely a perceptual
issue.
7. Note that your Working Capital is still growing, in spite of
falling prices, and examine your holdings for opportunities to
average down on cost per share or to increase yield (on fixed
income securities). Examine both fundamentals and price, lean
hard on your experience, and don't force the issue.
8. Identify new buying opportunities using a consistent set of
rules, rally or correction. That way you will always know which
of the two you are dealing with in spite of what the Wall Street
propaganda mill spits out. Focus on value stocks; it's just
easier, as well as being less risky, and better for your peace
of mind. Just think where you would be today had you heeded this
advice years ago...
9. Examine your portfolio's performance: with your asset
allocation and investment objectives clearly in focus; in terms
of market and interest rate cycles as opposed to calendar
Quarters (never do that) and Years; and only with the use of the
Working Capital Model, because it allows for your personal asset
allocation. Remember, there is really no single index number to
use for comparison purposes with a properly designed value
portfolio.
10. Finally, ask your broker/advisor why your portfolio has not
yet surpassed the levels it boasted five years ago. If it has,
say thank you and continue with what you've been doing. This one
is like golf, if you claim a better score than the reality,
you'll eventually lose money.
11. One more thought to consider. So long as everything is
down, there is nothing to worry about.
Corrections (of all types) will vary in-depth and duration, and
both characteristics are clearly visible only in institutional
grade rear view mirrors. The short and deep ones are most
lovable (kind of like men, I'm told); the long and slow ones are
more difficult to deal with. Most corrections are "45s" (August
and September, '05), and difficult to take advantage of with
Mutual Funds. But amid all of this uncertainty, there is one
indisputable fact: there has never been a correction that has
not succumbed to the next rally... its more popular flip side.
So smile through the hum drum Everydays of the correction, you
just might meet Peggy Sue tomorrow.
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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