Déjà Vu, All Over Again (and again...)
by Steve Selengut
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. And despite a high
DJIA, we are in the second month of a correction.
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" 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. There is still plenty of good news, but neither the media
nor the presidential hopefuls pay much attention to it: (1) Employment,
jobs, and unemployment numbers are good. (2) Manufacturing numbers are
strong. (3) The inflation rate is historically low. (4) Interest rates
are closer to historical lows than hysterical highs. (5) Durable goods
orders are fine. (6) Corporate earnings reports have been strong. (7)
Corporate dividend payouts have not been cut. (8) Our economy is still
the biggest and strongest in the world, in spite of government efforts
to prevent that from continuing. (9) We are in our second consecutive
mild hurricane season, so far.
The bad news isn't all that bad either, pretty much the same ole stuff:
(1) There's always been a war of some kind, particularly in the Middle
East, and the one in Iraq certainly appears "unwinnable". (2)
Energy prices are high, but I still don't see any gas lines, or any new
exploration or refining capacity in North America. More than half the
cars you see are SUV gas-guzzlers. (3) Trade deficits, and jobs leaving
the country are really not news; they are the result of misguided tax
and tariff policies. (4) High consumer debt. New? Not. (5) The terrorism
threat has been a major serious problem for the past how many years? We're
trying to deal with it. (6) The federal regulatory agencies probably do
more damage to the economy than everything else combined. (7) Social Security,
the IRC, and health care are still the major problems we face and ignore.
Clearly, there are no new economic problems to be overly concerned about.
And for now, we 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 Market Cycle, something
Wall Street tries to ignore and the media constantly misunderstands. Markets
move in both directions, it's their thing, just like a woman changing
her mind... 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. 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 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. 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 elect new people who know how
to connect the economic dots.
But for now, relax and enjoy this correction. It's your invitation to
the fun and games of the next rally.
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"