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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
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