When your investment time horizon is forever, corrections in markets such as the current one we are experiencing are welcomed. Especially when valuations have been high for years. It's like being in the market to buy a new computer but prices are marked up so high you feel less inclined to buy. Similar logic applies towards stocks in many ways.
As of today, S&P is down -17%, Dow -16%, and the Nasdaq -22% of the all-time highs. Markets are all over the place and volatility is high. Many friends and family around me have begun to sell out of markets due to fear. Even good corporate earnings can’t stop investors from selling. Sentiment has shifted quickly and more investors are worried we may be entering a bear market with the possibilities of a recession next year.
There are lots of uncertainty in the marketplace that’s for sure. The drop in valuations were one of the fastest I can recall in my short 18 year period of investing. Markets move much faster which probably has a lot to do with computer driven algo’s. Along with the boom in ETF trading that moves huge portions of markets as trades are executed.
Uncertainty = Opportunity
The correction has kept me busy deploying cash holdings. I enjoy going shopping every 10-15% correction and have my own set of principles that keep me disciplined on when and how I deploy the cash. Every investor should have their allocation plan in place to help make better decisions tailored to their own risk appetite. As of today, I have spent 50% of my cash purchasing stocks. My plans are to continue shopping if markets correct deeper into the correction.
A large portion of my portfolio is in growth stocks. Yes, I took a hard hit during the last 3 months but I’m more excited to see prices come down. Valuations for the past few years were high which has kept me holding a certain amount of cash waiting on the sidelines. It feels good putting that cash back to productive use.
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Thinking like a long term investor.
Looking back from 2001, I made some horrible trades. Simply holding onto my investments would have resulted in much better returns. The thousands of trades I placed resulted in higher fees and short-term taxes that caused me to under perform the S&P during my earlier years. I did have some luck here and there, but it took me years to recognize I was not a good trader. Learning how to invest on my own, I made many stupid mistakes along the way that’s for sure.
Fortunately, I learned my lesson and no longer try to short term trade and began thinking like a long term investor. This dramatically helped me navigate my first financial crisis in 2008. Thinking back, I'm thankful for having gone through that market turmoil which was one of the most educational period in my investing experience.
Most valuable lessons are attained during times of uncertainty and turmoil. That’s when everyone seeks guidance and wisdom from the greatest minds from every industry. In fact, many of my investing principles were cemented into my investment philosophy during such times.
Don’t become an Ostrich.
The news is filled with analysts and economists trying to make sense of why the market is declining. Many financial experts are advising the individual investors to turn the news off during times of volatility because it may cause them to make bad investment decisions. It’s like asking investors to put their heads into the ground just as an ostrich would when scared. Personally, I believe it's during these times that one should keep your heads up and read as much as one can to learn. Lots of great minds likely share great stories of their mistakes during such times that many of us can reflect and learn from.
A quote from Warren buffet comes to mind, “It’s good to learn from your mistakes. It's better to learn from other people’s mistakes.”
Have you been Christmas shopping? Are you shopping for any stocks? I hope everyone has a great Christmas weekend and holiday season filled with lots of gifts and great food! Thanks for reading.
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