The Big Picture

“Look at market fluctuations as your friend not your enemy; profit from folly rather than participate in it.” – Warren Buffet

The oracle does give some sage advice.

As promised, I will tend to compose more posts during material market volatility, material changes in market and economic data, or generally unfavorable market environments. The goal is not to flood your inbox with blather, rather keep you up to date on material events worth discussion.

Is the correction over?

The dramatic part of the correction appears to have subsided. I am not calling shots here as that is a futile task. Feel free to tune in to your manic-media station if you would like to hear statements from pundits that add absolutely no value to the effort at hand.

While I can provide no concrete assurance that the correction is over, I can share some details on how corrections generally play out as well as some thoughts for addressing them.

Have a Plan and a Process!

From the Trenches

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than in corrections themselves.” – Peter Lynch

The anatomy of a correction.

Do corrections follow a similar pattern? In many cases they do. A look at our current correction: The initial drop, where many investors experience an emotional reaction and their desired action is to sell, dare I say panic a bit (shown below red shaded). The reversionary bounce, or initial recovery rally, where some investors see opportunity and buy (shown below green shaded).

S&P 500 Oct. 2017 through Feb. 16 2018. All-time high Jan. 26 at 2872 with intraday low of 2532 on Feb. 9. Peak to trough decline of 13.4% (StockCharts).

Here is what is interesting. The true test has yet to begin. Will the market return to its bullish trend or are we looking at a possible change in trend? That is the question mark above.

Understanding that there is, of course, no assurance on the future. We must rely on process. If you are looking for details on the process for assessing whether the markets may be changing from bullish to bearish, please feel free to reach out.

Bottom line: This correction has followed a similar pattern to many corrections past. However, the true test is about to begin.

The Weeds

“Investing should be more like watching paint dry or grass grow. If you want excitement, take $1000 and go to Las Vegas.” -Paul Samuelson

Action or Reaction? During corrections, should we take action? I would propose we do not react. Sometimes, we should do nothing.

Before undertaking any actions during corrections as well as periods of heightened volatility, it is helpful to have a set process to address these scenarios. What are some of the points of the process? Questions such as the following:
• Is the correction justifiable? Or, do we have a catalyst that justifies/explains why the correction occurred?
• Has material market data changed? Such as earnings, valuations, etc.
• Has the economy shown a turn for the worse? What does economic data propose?
There are many additional points to consider.

Do nothing, react, or take action. What actions may be beneficial in a correction? The most obvious is it may be a great time to explore an opportunity that was more expensive just a week ago! Often times corrections offer opportunity.

Again, there is no way to know the future with certainty, especially the very immediate term! Step one is to accept uncertainty. Step two is to manage uncertainty through process.

Bottom Line: Reacting is generally not a good prescription. Action taken on a sound process may be a great solution to exploit opportunity. Sometimes, doing nothing is the best bet.