Market Correction, now we are getting somewhere! (Covid-19 Update #5)

10th March 2020

The chart above shows the decline on the US share market so far in 2020

You can always rely on the popular media to let you know when something really bad is happening. 

Overnight, markets around the world have dropped sharply, with the Dow Jones (the American market) dropping by around 2,000 points.  This is a meaningful decline of around 7%, which in addition to the previous 12% to 15%, brings us in line with my threshold of a 20% decline. 

Why is that relevant?

The simple reason is that this, in my view, is where real value may begin to emerge.

To be clear, this 20% decline in prices does not itself represent real value.  It is simply prices declining to get us to the point where value may now emerge. 

Should we be concerned?

No.

Why not?

Price and value are still not the same thing.  Remember, we are business owners, not traders or people who play the share market.  Notwithstanding The Rule of Five (some businesses perform better than others long term), your investment portfolio is made up of mostly sound businesses. 

The trading price today compared to yesterday bears no relationship with the underlying performance of the business.

This might be a good test for you though (?). 

If you feel anxious at all because prices are dropping, then this is telling us that further training and experience for you might be beneficial to help you to become ‘at one’ with how declining prices allow value to emerge.  What do you think? 

By the way, as I mentioned the other day, if you are feeling anxious or concerned, just e-mail invest@wiseplanning.co.nz to let us know or call 0800 11 90 80.  We should talk about it.

What just happened?

The cause of the latest route in the markets is ongoing Coronavirus fears, along with a sharp decline in the oil price caused by Russia and Saudi Arabia having a strong disagreement as to how to control the flow of oil. 

Interestingly, America is now a major oil producer and less reliant on other countries around the world for oil. 

This is part of the unique package that America has, that I have talked about in the past.  Whilst America does have a reasonable amount of debt, it also has a unique package that no other country possesses.  That is good news for America, for investors and the world. 

Where to next?

I was talking with one of my good clients (John) the other day, who mentioned to me that he reckoned there was a good possibility of the so-called ‘dead cat bounce.’  That is wisdom from Timaru right there! 

This is a trading term, which basically says that when markets decline, some cunning traders start buying up, to lead the market to believe that there is recovery at play and so, those without a proper methodology or who are greedy and just want to make money quick start buying too.

What happens next is those crafty traders then sell hard, causing a significant decline greater than the first one.  This looks like what we have seen over the last day or two.  

I hasten to add that we are not interested in trying to predict markets or second guess what is going to happen next, there is no need.  That is because we are business owners, not traders, and we are certainly not looking to play the share market. 

I mentioned the other day, the importance of allowing the market to deliver the opportunities to you. 

That cannot happen if you are a servant to the market.  You are a servant to the market when you suffer from anxiety as prices decline (and feel happy when prices rise).  Better to be bored when markets rise, holding onto cash and ‘happiness filled’ as prices decline. 

Wait a minute, my portfolio is dropping!

Yes, that is right.  I know, for some, this may seem counterintuitive.  The reality is, you are not going to easily locate bargain prices with the cash up value of your portfolio rising strongly.  Indeed, the opposite is the way it works. 

In case you need reminding, market corrections and the cash up value of your portfolio declining, however sharply and by however much, is temporary.  It is not permanent.  Prices will recover.  

TIP: avoid overthinking it.

The key issue here is whether you just tolerate volatility or whether you truly understand it and see it as opportunity.  Where do you sit?

Where to next is, we are now in a position to consider building on the businesses currently within your portfolio, particularly if you have a more Advanced Investment Strategy.  Remember, we are looking to concentrate the portfolio and build in more small caps in order to build in that performance longer term. 

Just to reiterate that point, this is the kind of environment, when you build in that additional performance on your portfolio longer term.  That is because you will be taking advantage of lower prices and building in that performance as the value emerges. 

Let’s relax, assess the opportunity

If you worry about declining prices or suffer from FOMO (fear of missing out), you are a servant to the markets – bad idea.  Seriously, we should talk about it if that is you.  Do you need to own up to it in the first place though? 

As always, we adopt an iterative approach, taking advantage of lower prices and where the best value can be found.  That is my job.  If you have any thoughts on it though, feel free to get in touch and let me know. 

1987 share market ‘crash’

The above chart shows the movement of the American share market since a bit prior to 1985 (that was over 30 years ago!)

See if you can find 1987 on the chart above.

I will keep you posted.