Steve Selengut |
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". [email protected] 800-245-0494 Visit Sanco Services.com. |
Steve Selengut
has written 9 articles for SB Informer. |
View all articles by Steve Selengut... |
Wall Street Conventional Wisdom and Stock Market CorrectionsCorrections are always buying opportunities. Steve Selengut
November 14, 2007
|
|
| 1.0/5.0 (1 votes total) |
|
|
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. Your accountant doesn't want
you to take profits, and has you convinced that losses are really
better than gains. (3) Higher Interest rates are good for investors...
so are lower interest rates. Wall Street doesn't really care. They push
short-term vehicles to address investors' fear of price fluctuation,
and shun simplex income producing strategies while they promote complex
derivatives that always unwind badly. (4) The calendar year is of no
particular investment relevance. (5) Investment performance analysis
should be an objective based program monitor instead of 365-day horse
race with irrelevant Market indicators. Wall Street used to agree with
(4) and (5). Since then they have learned that they make more money
from unhappy investors.
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 securities to reduce the cost per
share. Make your retirement plan contributions yesterday!
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!
The problems, and the solutions, boil down to focus, understanding, and
retraining. 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 embrace a more manageable asset allocation approach that
centers on your portfolio's Working Capital. You need to stop looking
at your account on line so frequently and go to the movies. You need to
elect new people who know how to connect the economic dots and who will
restructure the tax code to eliminate all taxation of investment
earnings. Corrections fuel rallies, it's just a matter of time. But for
now, relax and enjoy this correction. It's your invitation to the fun
and games of the next rally, when you will see that correction is
spelled o-p-p-o-r-t-u-n-i-t-y after all. Note: The 2nd Edition of "Brainwashing" is here!
|