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Wall
Street Conventional Wisdom and Stock Market Corrections During every correction, I encourage investors to avoid the destructive inertia that results from trying to determine: how low can we go; how long will this last? Investors who add to their portfolios during downturns invariably experience higher Market Values during the next advance. For just as surely as there is a Santa Claus for every five year old, there is another "value stock" rally for every fingernail biting fifty-five year old. Value Stocks have entered the sixth month of a broad downturn, and nearly 50% of all Investment Grade companies are now down more than 15% from their highs. Seventy percent of those are down more than 20%. Working Capital Model users should be running out of cash about now, while they add more issues to their portfolios, and more shares to existing holdings. Investors know that good companies rarely close their doors, or even cut their dividends. Corrections are as much a part of the normal Market Cycle as rallies, and they 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 lunacy. 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. Corrections in both Equity and Income securities produce the same kind of hysteria as a spring sale at Macy's... but in reverse. The fundamental quality of value securities does not change simply because their prices fall in response to market conditions. When all value stocks are moving lower, it's an opportunity, not a problem. When all [insert: bank, insurance, agriculture, oil, entertainment, travel, transportation, advertising] are lower, it's an opportunity, not a problem. During every
correction, I'm amazed at the shocked reaction of the Media,
the confused explanations emanating from the Market Gurus, and
the incredibly poor advice streaming forth from the Oracles
of Wall Street... every last one of them. It's no wonder that
the average investor is in a state of panic! If they could buy
a new car, a new business suit, or a new house for half price,
they would be ecstatic! Why does a lower price for a share of
a high quality stock make them go bonkers? The Conventional
Wisdom from Wall Street makes it so; the Conventional Wisdom
from CPA land reinforces it; the Conventional Wisdom from financial
advisors preys upon it. Experienced Investor Wisdom is boldly
different. For example: (1) Corrections are always buying opportunities,
the broader the correction, the better. Wall Street thrives
on the fear and suffering. (2) Rallies are always selling opportunities.
Wall Street would rather stroke your greed button with visions
of upward only prices! Repetition
is good for your 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, 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. But uncertainty is the regulation playing field
for investors, and hindsight isn't welcome in the stadium. Rarely
do corrections kill good companies, no matter how bad the news,
how big the scandal, or how troubled the economic outlook. If
you've been investing in quality companies and have a secure
cash flow within your portfolios, you will weather any storm.
Loss taking is never smart, savvy, or necessary... even if it
cuts the tax bill. Buy more of lower priced good companies while
maintaining smart diversification according to the Working Capital
Model. Add to lower priced income s! There is
an Investment Mindset Solution for the problems that most people
have dealing with corrections, recessions, inflation and the
Red Sox. Bad news creates opportunities; so does good news.
I've never understood why yard-sale prices in the stock market
are so scary. And recession? Most people don't realize that
a recession is just two consecutive quarters of lower GDP. Not
a big deal until it happens, and then, really good things get
done to fix it! In recent years, Wall Street and the media have
turned the process of investing into a competitive event. What
was once a 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" in terms of cycles! Steve Selengut
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