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During every correction, I encourage investors to avoid the destructive inertia that results from trying to determine: how low can we go; how long will this last? Investors who add to their portfolios during downturns invariably experience higher Market Values during the next advance. For just as surely as there is a Santa Claus for every five year old, there is another “value stock” rally for every fingernail biting fifty-five year old. Value Stocks have entered the sixth month of a broad downturn, and nearly 50% of all Investment Grade companies are now down more than 15% from their highs. Seventy percent of those are down more than 20%. Working Capital Model users should be running out of cash about now, while they add more issues to their portfolios, and more shares to existing holdings. Investors know that good companies rarely close their doors, or even cut their dividends.

Corrections are as much a part of the normal Market Cycle as rallies, and they can be brought about by either bad news or good news. (Yes, that’s what I meant to say.) Investors always over-analyze when prices become weak and lose their common sense when prices are high, thus perpetuating the “buy high, sell low” Wall Street lunacy. Waiting for the perfect moment to jump into a falling market is as foolish a strategy as taking losses on investment grade companies and holding cash. Corrections in both Equity and Income securities produce the same kind of hysteria as a spring sale at Macy’s… but in reverse. The fundamental quality of value securities does not change simply because their prices fall in response to market conditions. When all value stocks are moving lower, it’s an opportunity, not a problem. When all [insert: bank, insurance, agriculture, oil, entertainment, travel, transportation, advertising] are lower, it’s an opportunity, not a problem.

During every correction, I’m amazed at the shocked reaction of the Media, the confused explanations emanating from the Market Gurus, and the incredibly poor advice streaming forth from the Oracles of Wall Street… every last one of them. It’s no wonder that the average investor is in a state of panic! If they could buy a new car, a new business suit, or a new house for half price, they would be ecstatic! Why does a lower price for a share of a high quality stock make them go bonkers? The Conventional Wisdom from Wall Street makes it so; the Conventional Wisdom from CPA land reinforces it; the Conventional Wisdom from financial advisors preys upon it. Experienced Investor Wisdom is boldly different. For example: (1) Corrections are always buying opportunities, the broader the correction, the better. Wall Street thrives on the fear and suffering. (2) Rallies are always selling opportunities. Wall Street would rather stroke your greed button with visions of upward only prices. Your accountant doesn’t want you to take profits, and has you convinced that losses are really better than gains. (3) Higher Interest rates are good for investors… so are lower interest rates. Wall Street doesn’t really care. They push short-term vehicles to address investors’ fear of price fluctuation, and shun simplex income producing strategies while they promote complex derivatives that always unwind badly. (4) The calendar year is of no particular investment relevance. (5) Investment performance analysis should be an objective based program monitor instead of 365-day horse race with irrelevant Market indicators. Wall Street used to agree with (4) and (5). Since then they have learned that they make more money from unhappy investors.

Repetition is good for your CPU, so forgive me for reinforcing what I’ve said in the face of every correction since 1979… if you don’t love corrections, you really don’t understand the financial markets. Don’t be insulted, very few financial professionals want you to see it this way and, in fact, Institutional Wall Street loves it when individual investors panic in the face of uncertainty. But uncertainty is the regulation playing field for investors, and hindsight isn’t welcome in the stadium. Rarely do corrections kill good companies, no matter how bad the news, how big the scandal, or how troubled the economic outlook. If you’ve been investing in quality companies and have a secure cash flow within your portfolios, you will weather any storm. Loss taking is never smart, savvy, or necessary… even if it cuts the tax bill. Buy more of lower priced good companies while maintaining smart diversification according to the Working Capital Model. Add to lower priced income securities to reduce the cost per share. Make your retirement plan contributions yesterday!

There is an Investment Mindset Solution for the problems that most people have dealing with corrections, recessions, inflation and the Red Sox. Bad news creates opportunities; so does good news. I’ve never understood why yard-sale prices in the stock market are so scary. And recession? Most people don’t realize that a recession is just two consecutive quarters of lower GDP. Not a big deal until it happens, and then, really good things get done to fix it! In recent years, Wall Street and the media have turned the process of investing into a competitive event. What was once a long-term, goal-directed activity has become a series of monthly and quarterly sprints. The direction of the market isn’t nearly as important as the actions we take in anticipation of the next change in direction. Performance evaluation needs to be “rethunk” in terms of cycles!

The problems, and the solutions, boil down to focus, understanding, and retraining. You need to focus on the purposes of the securities in the portfolio. You need to understand and accept the normal behavior of your securities in the face of different environmental conditions. You need to overcome your obsession with calendar period Market Value analysis, and embrace a more manageable asset allocation approach that centers on your portfolio’s Working Capital. You need to stop looking at your account on line so frequently and go to the movies. You need to elect new people who know how to connect the economic dots and who will restructure the tax code to eliminate all taxation of investment earnings. Corrections fuel rallies, it’s just a matter of time. But for now, relax and enjoy this correction. It’s your invitation to the fun and games of the next rally, when you will see that correction is spelled o-p-p-o-r-t-u-n-i-t-y after all.

Note: The 2nd Edition of “Brainwashing” is here!