Kort Session 4–How to Prepare for the Next Correction (Or Worse)

BillThis is a really tough topic, because we don’t know exactly when it happens or from what level of the indices it will come.  One thing is certain it will become the next big question among the financial talkers and that some of their pronouncements will be very dire…. from 10 or 15% down to “this is it baby, batten down the hatches”!  Importantly, most of the market mavens you will hear from, including the knuckleheads that anchor these shows, will have an opinion and by the time it is over it will have become an obsession.   You see, that is how they get paid.(i.e. butts in the seats, eyes glued to the tube).  So the more worrisome they make it, the better.

All of these people seem to have the idea that with a little attention to detail the investor can trade his or her way around these potholes.  There are some very adept traders out there.  I am not one of them.  Chances are you aren’t either. So how are you supposed to react to these pronouncements?

Sit back.  Breath in.  Breath out.  Chances are at worst case, this will not be the end of the world…. a very rare occurrence indeed.  Think about the real reason you own these assets.  What does that stock certificate really represent?  It represents a fractional share in a REAL business.  This is important because there would be no way in the world, if you were the owner of 100% of that enterprise,  you would consider selling it because the economy was about to (or forecasted to) enter a recession. … this with the idea you could buy it back for less at the bottom of said setback.

My belief is that the only reason that people think that they can time this with a stock, is because it is liquid and tradable, not because they are smart enough to get it right in the forest of noise.  So if you owned shares in really great companies or had a really competent investment manager running your money, why would you be out of the market for a correction or a recession?

Ah, yes, there are those pesky Black Swan events (rarely seen, they hit you out of the blue), a la September 11, 2001 and the financial panic of 2008, do happen.  On top of this, secular Bear Markets a la 1966-1982 and 2000-to the present, do happen.  The problems are what to sell, when to sell and when to get back in.  In the meantime it would have been shame if you sold your Apple stock in March of 2000 to avoid the bursting of the Tech Bubble and the 13 years of sideways markets. Importantly, the past thirteen years are history… in the rear view mirror.  You have to stop playing those old tapes, even though the media crowd continues to dredge up those memories.

In defense of buying and owning stocks today, I would say you have had 13 years to work out the excesses of the Tech Bubble, the shock of a major global financial panic and the new world of global terrorism.  Even though we face other daunting problems, PEs are averaging around 14 times vs. 17 or 18 times ten years ago.  Most importantly there are no competitive rates being offered in the fixed income market.  At the start of the last great Bull Market (1982) you could easily get 10% more on FDIC insured CDs.

So as it pertains to trading the coming correction in our overbought market I would differ to a quote from Clint Eastwood’s “Dirty Harry”, “Do you feel lucky…”.  I reiterate trading to avoid dips is tough and foolish in the context of owning a business…unless of course you don’t know or understand the business you own. If that is the case you should let an ETF or Money manager do the driving.

Let me take this back to the media, investing and you.  If you pay attention to the media, you should begin hearing their take on the next move down in the market (the correction or worse).  If you heed this information you are taking a chance, as they are often wrong.  Witness how long it has taken any of the major outlets (CNBC, FOX, MSNBC, CNN etc.) to admit any improvement in the economy.  They were nowhere to be found with any positive comments at the bottom in 2009, or for that matter most of the last four years.  And today they continue to question the validity or vitality of the current up move.  Even though we have had a great market over the past few years, I believe the odds still favor your participation.  Hang in there.

The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.

 

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