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
folk 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
Professional Investment Portfolio Manager since 1979
BA Business, Gettysburg College; MBA Professional Management,
Pace U.
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”
