Welcome to the BIG Buy Low
By Steve Selengut
Professional Investment Portfolio Manager since
1979
BA Business, Gettysburg College; MBA Professional Management
Johns Island, SC, U.S.A.
Sanserve[at]aol.com
www.sancoservices.com
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Every correction is the same, a normal downturn in one
of the Markets where we invest. There has never been a correction that
has not proven to be an investment opportunity. You can be confident
that the Federal Reserve, as hypnotized as it is with keeping inflation
under control, is not going to cause either a financial panic or a prolonged
recession with tight money and high interest rate policies. While everything
is down in price, as it is now, there is little to worry about. When
the going gets tough, the tough go shopping.
Every correction is different, the result of various
economic and/or political circumstances that create the need for adjustments
in the financial markets. In this case, an overheated real estate market
has finally taken a breather; an overdose of bad judgment among lending
institutions is producing a major hangover; and an overheated Stock
Market, propelled by demand for speculative derivative securities (ETFs),
and Hedge Funds, is finally falling back to more earthly levels.
The reality of corrections is one of the few certainties
of the financial markets, a reality that separates the men from the
boys, if you will. If you fixate on your portfolio Market Value during
a correction, you will just give yourself a headache, or worse. None
of the fundamental qualities that made your securities "Investment
Grade" just three months ago - when your Market Value was at an
All Time High - have changed. No interest payments or dividends have
been cut. Only the prices have changed, to preserve the reality of things
- and in both of our markets. Welcome to the Big Buy Low! Corrections
are beautiful things, but having two of them going on at the same time
is like a trip to Fantasy Land. Theoretically, even technically I'm
told, corrections adjust 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. Additionally, the new breed of Index
Fund Speculators is ready for a reality smack up alongside the head.
Thus, new investment opportunities are abundant! Here's a list of ten
things to think about or to do during corrections:
1. First of all, don't beat yourself up by looking
at your account Market Value. You don't live in a vacuum and
you are not immune to market price variations. That is why we only buy
the highest quality securities in the first place and stick with a well-defined
Asset Allocation plan. Look for ways to add to your portfolios - that's
what the smart guys are doing.
2. Take a look at the past. There has
never been a correction that has not proven to be a buying opportunity,
in spite of the media hype that this one is special. When they are broad,
fast, and deep, the rally that follows is normally broad, fast and steep.
Get ready to party.
3. The "Smart Cash" that
was accumulating during the last rally - the one that ended abruptly
in May, should be put back to work, and probably will be too soon. That's
also normal. There are no crystal balls, and no place for hindsight
in an investment strategy. Buying too soon, in the right portfolio percentage,
is nearly as important to long-term investment success as selling too
soon is during rallies.
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 securities now (as you certainly should 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 Wall Streeters are still just
scratchin' their heads.
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, and you may run out of cash well before the new rally begins.
Cash flow is king, so take smaller profits sooner than usual so long
as there are abundant buying opportunities.
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 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 your 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.
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. So long as everything is down, there is
nothing to worry about. Downgraded (or simply lazy) portfolio
holdings should not be discarded during general or group specific weakness.
Unless of course, you don't have the courage to get rid of them during
rallies - also general or sector spefical (sic).
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; the long
and slow ones are more difficult to deal with. Most recent corrections
have been short (August and September, '05; April though June, '06)
and difficult to take advantage of with Mutual Funds. So if you over-think
the environment or over-cook the research, you'll miss the party. Unlike
many things in life, Stock Market realities need to be dealt with quickly,
decisively, and with zero hindsight. Because amid all of the uncertainty,
there is one indisputable fact that reads equally well in either market
direction: there has never been a correction-rally that has not succumbed
to the next rally-correction.
If you were head scratching on Smart Cash, Working
Capital, or The Investor's Creed, it's time to order the newly revised
edition of Brainwashing.
Steve Selengut:
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
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"
Published - October 2007
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