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"
