Market
Corrections can be good for the wallet! Corrections are part of the
normal “shock market” menu, and can be brought about by either bad news
or good news. 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.
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
sanserve@aol.com
800-245-0494
http://www.sancoservices.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"
