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Stock Market Correction: Month Nine And Counting

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Submitted by The Investment Shadow | RSS Feed | Add Comment | Bookmark Me! print

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 than those who cower in a fearful corner.

Just as certainly as balanced portfolios are safer long term than equity only portfolios, there is absolutely another rally in our future. We are in month nine of an equity downturn; month eight of a tax free CEF rally.

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 become weak and lose their common sense when prices are high, thus perpetuating the "buy high, sell low" media directed 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.

Repetition is good for the investor's soul, so forgive me for reinforcing what I've said in the face of every correction since 1979: If you don't love these natural occurrences, if you don't love price volatility, you really don't understand the financial markets and/or the difference between speculating and investing.

Don't be insulted, I've been relatively alone in this belief for decades.... and I've shifted to the conclusion that institutional Wall Street no longer loves it when individual investors panic in the face of falling equity prices.

The regulators have replaced variable cost "commissions" with fixed expense "fees" making corrections a short term problem for their meant-to-be "upward only" total return numbers.

Psst, corrections are part of the cyclical mystique of investment theater, they are what makes rallies so profitable, so quickly, for MCIMers.

It's human nature to want an explanation for corrections... something other than profit taking, that is. There's so much for the media to choose from: employment numbers, manufacturing statistics, inflation prospects, and interest rate expectations.

Then there's durable goods orders, corporate earnings reports, the economic outlook here and abroad, the weather, climate change, energy prices, the trade deficit, high consumer debt, unemployment, and conditions in the Middle East ... just to name the obvious few.

Rarely, if ever, is anything new put forward as the direct and irrefutable cause of the new correction... the longer this one lasts, the more theories will be proposed and the more actions (hedges) will be recommended.

But as different as the investment environment (theoretically) is today from what it was in 2008, or 2000, or 1987, you will never hear anyone explain (any louder than this non-institutional whisper) this clear, simple, and omnipresent fact:

There has never, no not ever, been a correction of any magnitude, broad based or sector specific, that has not turned out to be an investment opportunity... especially with regard to Investment Grade Value Stocks.

A true investor will someday come to the conclusion that a major correction is nothing more than the Xtra Large version of the opportunities the investment gods provide regularly in the form of (generally disrespected) volatility. EUREKA!

If you don't, without reservation, love volatility, you shouldn't be investing in the stock market... no matter what "product" you are using.

Clearly, there will always be new economic problems and challenges, while others vanish. As investors, we simply have to deal with the opportunities at hand. The threat of higher interest rates and the growing scarcity of reasonable yield, and high quality, fixed income paper is Opportunity #1, in income CEFs.

Opportunity #2 is in the equity markets, where nearly half the S & P's best ranked companies were recently down an average 30% from their 52-week highs. This is not new people. It's called "The Market Cycle" a fact of investment life that just doesn't fit well into Wall Street's, MPT driven, "long con". 

Markets move in both directions, it's their thing, just like politicians talking out of both sides of their mouths...

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. Prices of high quality securities always seem to bounce back eventually. And there need be no rush for this to happen...

In recent years, Wall Street and the media have turned the process of investing into a competitive event of Olympic proportions. 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 directional change. Performance evaluation needs to be rethunk (sic) in terms of cycles!

The problems, and the solutions, boil down to focus, understanding, and retraining. You need to focus on the purpose of each security in the portfolio. You need to understand and accept the normal behavior of your securities in the face of different environmental conditions.

You particularly need to overcome your obsession with calendar period market value and/or total return analysis, and embrace a more manageable asset allocation approach that centers on growing, income productive, portfolio Working Capital.

Just for kicks, and to get an appreciation for how completely Wall Street ignores the Market Cycle, Google: Market Cycle Investment Management...

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 always spelled o-p-p-o-r-t-u-n-i-t-y.


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