on Investing

Learning To Dig The BIG Buy Low

Corrections can be beautiful things

by Steve Selengut

Mr. Selengut is a private investor and a regular contributor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at sanserve@aol.com. This article was first published in 2014 and has been updated to reflect sentiments toward today’s market-climate.

Originally published here in 2015, we’ve revisited Mr. Selengut’s views on corrections.

February 3, 2017 — Every correction is the same, a normal downturn in one or more of the markets where we invest. There has yet to be one that has not proven to be an investment opportunity. While everything is moving lower in price, as it is now, there is little to worry about. When the going gets tough, the tough must 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 overdose of socialism has caused a troublesome hangover in Europe — throwing a second knockdown punch at a still speculative, derivative driven market.

Isn’t our captain sailing our economic ship in the same direction?

The reality of corrections is one of the few certainties of the financial world, 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.

None of the fundamental qualities that made your securities “investment grade” just months ago (when your market value should have been at an All Time High) have changed. Only the prices have changed, to protect the reality of things equity — income CEFs remain at their highest levels in five years. Welcome to another equity “buy lower” opportunity!

Corrections are truly beautiful things. Theoretically, 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 and ETF speculators rarely take profits but frequently take losses. New investment opportunities are abundant!

Ten things to think about or to do during corrections:

  • 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 you should 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.
  • 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 somehow special. When they are broad, fast, and deep, the rally that follows is normally broad, fast and steep. Get ready to party — but when!?
  • The “smart cash” that was accumulating during the last rally, the one that ended abruptly this Spring, should be put back to work gradually. 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.
  • 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 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.
  • As, or if, the correction continues, buy more slowly and establish new positions incompletely so that you can add to them safely later. Hope for a short and steep decline, but prepare for a long one. It’s OK to run out of cash well before the new rally begins.Take smaller profits sooner than usual as long as there are abundant buying opportunities. Today, thirty-three percent the IGVSI universe (Google it) are down more than 15% from 52-week highs.
  • The Market Cycle Investment Management methodology expects you to 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.
  • Note that your Working Capital is still growing, in spite of falling prices, and examine your income CEF holdings for opportunities to average down on cost per share and to increase yield. Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.
  • 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 Investment Grade Value Stocks; it’s easier, less risky, and better for your peace of mind.
  • 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; and only with the use of the Working Capital Model, because it allows for your personal asset allocation. The only index numbers to use for comparison purposes with a properly designed portfolio are the IGVSI and the WCMSI.
  • 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 specifical (sic).
If you over-think the environment or over-cook the research, you'll miss the after-party. Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight.

Corrections of all types vary in depth and duration, and both characteristics are clearly visible only in institutional rear view mirrors. The short and deep ones are most lovable; the long and slow ones are more difficult to deal with. Most are relatively short and difficult to take advantage of with ETFs.

If you over-think the environment or over-cook the research, you’ll miss the after-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.