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Welcome
to the BIG Buy Low Every correction is the same, a normal downturn in one of the Markets where we invest. There has never been a correction that has not proven to be an investment opportunity. You can be confident that the Federal Reserve, as hypnotized as it is with keeping inflation under control, is not going to cause either a financial panic or a prolonged recession with tight money and high interest rate policies. While everything is down in price, as it is now, there is little to worry about. When the going gets tough, the tough go shopping. Every correction is different, the result of various economic and/or political circumstances that create the need for adjustments in the financial markets. In this case, an overheated real estate market has finally taken a breather; an overdose of bad judgment among lending institutions is producing a major hangover; and an overheated Stock Market, propelled by demand for speculative derivative securities (ETFs), and Hedge Funds, is finally falling back to more earthly levels. The reality
of corrections is one of the few certainties of the financial
markets, a reality that separates the men from the boys, if
you will. If you fixate on your portfolio Market Value during
a correction, you will just give yourself a headache, or worse.
None of the fundamental qualities that made your securities
"Investment Grade" just three months ago---when your
Market Value was at an All Time High---have changed. No interest
payments or dividends have been cut. Only the prices have changed,
to preserve the reality of things---and in both of our markets.
Welcome to the Big Buy Low! 1. First of all, don't beat yourself up by looking at your account Market Value. You don't live in a vacuum and you are not immune to market price variations. That is why we only buy the highest quality securities in the first place and stick with a well-defined Asset Allocation plan. Look for ways to add to your portfolios---that's what the smart guys are doing. 2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, in spite of the media hype that this one is special. When they are broad, fast, and deep, the rally that follows is normally broad, fast and steep. Get ready to party. 3. The "Smart Cash" that was accumulating during the last rally---the one that ended abruptly in May, should be put back to work, and probably will be too soon. That's also normal. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies. 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 securities now (as you certainly should 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 Wall Streeters are still just scratchin' their heads. 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, and you may run out of cash well before the new rally begins. Cash flow is king, so take smaller profits sooner than usual so long as there are abundant buying opportunities. 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 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 your 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. 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. So long as everything is down, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should not be discarded during general or group specific weakness. Unless of course, you don't have the courage to get rid of them during rallies---also general or sector spefical (sic). If you were head scratching on Smart Cash, Working Capital, or The Investor's Creed, it's time to order the newly revised edition of Brainwashing. Steve Selengut
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