This article was originally published on TheStreet.com on February 13, 2014 at 6:30am EST
Relief rallies feel pretty good, don’t they? That’s what the past four trading sessions have been — we are still a couple percentage points below the recent peak, but it feels like investors are breathing a collective sigh of relief that last month’s correction never technically became a correction.
You call that a correction?
Up to a 10% decline can be called something like a pull-back, or a dip, but not a correction. A correction occurs whenever the stock market drops by 10% or more. And when we get to a 20% decline, peak-to-trough, we are now in a “bear market.” Is this information helpful at all? The answer is, “Not really.”
Were we in a bull market at the end of 2008? Nope — to invest at that point would have been no different than flushing your money down the toilet. Right? You would have been investing during a bear market!! Anybody who has passed the Series 7 knows that is a bad idea. And yet in hindsight it would have been one of the smartest things you could have done.
So we want to buy low and sell high, but the media would have you believe that we rarely want to buy during a correction, and absolutely never buy during a bear market. See the discord? Why is it so easy to buy a shirt or a box of cereal when it’s clearly marked “SALE” but so difficult when it’s a security in your portfolio?
In reality, the best times to buy are during bear markets and the best times to sell are during bull markets. Trouble is, you can look and feel quite foolish doing the right thing. Keep in mind that there will be an element of ‘wrong’ in every single one of your investment decisions — you will never buy at the absolute bottom and never sell at the absolute top. Come to terms with that, accept that this is not an exact science.
One definition of the word ‘correction’ is “Punishment intended to rehabilitate or improve.” Of course this is not the definition pertaining to the stock market, but I find the inclusion of the word ‘improve’ interesting. The efficient market hypothesis tells us that the market is perfectly efficient — that every security is priced exactly as it should be priced, given all publicly available information at any given moment. The market does not anticipate, it reacts, and as a result prices move — sometimes dramatically. A correction can be viewed as the market being punished so it can improve. I think this concept applies to each of us investors as well.
What were we hearing and reading about just one week ago? How the Fed’s tapering and corresponding spike in interest rates worldwide would put all emerging markets in a headlock, driving up borrowing costs and destroying their purchasing power one-by-one, starting with Turkey.
Since then we have watched rates stabilize even lower than when tapering first commenced on Dec 18th….
Pretty strange considering here is what happened to rates last May when Bernanke alluded to tapering (but the Fed kept its foot firmly on the gas):
R-A-L-L-Y spells Relief
In addition, on Tuesday we heard that Janet Yellen understands very well what is at stake in her role as Bernanke’s successor, and we saw stock markets here and abroad rally convincingly on her testimony. Perhaps most interesting is the fact that markets have rallied in direct correlation with their respective interest rate sensitivities. Below you can see that Emerging Markets had a better day Tuesday than other International (Ex-US) Markets, which in turn had a better day than the US Market.
Don’t get mad, get back to even…
I would argue that it feels better for investors to recoup losses than it does when portfolios hit all-time highs. When you have fallen below your previous personal high water mark, a bit of anxiety sets in that doesn’t quite relent until you “get back to where you were.” Of course this is short-sighted and a little silly when you take a step back, but it’s also just human nature. Nobody likes to give something away and get nothing in return except bad feelings.
And there is something scary and uncertain about hitting an all-time high — partly because we have never been there before, and partly because headlines start to shift toward things like “Is the Bull Finally Running Out of Steam??” or “[Insert Annoyingly Cynical Pundit] Says the Bubble is Getting Even Bubblier!”
So, despite the fact that what we experienced the first five weeks of the year was not technically a correction, was it enough to allow the markets and investors to improve their positions? Was last week the best buying opportunity we will see this year? How many people that were too afraid to buy “at the top” were still hesitant to buy last week for fear the pull-back might become a correction?
One thing I can guarantee — there will be many more pull-backs, dips, corrections, and crashes to come. My goal is not investing to avoid them, but investing to get through them. Investing to avoid all potential downside is like wearing a parka year-round for fear that winter may come early this year…
Interested in initiating a dialogue or becoming a client? Give us a call or email….
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main
Adam Scott’s profile on TheStreet.com can be found here.