I’ve written in the past about the three foundational principles of our Serious Money Approach. These principles, of course, apply to all investment seasons, but have special significance and provide comfort during periods of market stress.
Our current market has been in correction mode for about five months now (with smaller growth companies in correction mode for closer to one year). Compared to other recent corrections this one hasn’t corrected as deep as others but is lasting longer than recent corrections.
You wouldn’t be alone in wondering how this correction could possibly end, given the problems in the news (inflation, war, energy prices, et al.). This is where Faith in the Future (our Foundational Principle #1) saves the day. I cannot (nor you, I bet) think of a time when there were not seemingly insurmountable problems staring us in the face. But the problems in the past have resolved themselves one way or another–at least temporarily—and I think these problems will also resolve themselves. Put another way, Principle #1 states: “I don’t know how these problems will get solved but I have faith that they will get solved.”
OK, so we have faith that the problems will get solved, but when? The answer is that we don’t know when. But Principle #2 is Patience, and is, naturally, related to Principle #1: “I don’t know when the problem will get solved, but I know it will get solved sometime.”
But while we’re waiting for solutions and for the market to recognize that solutions are on the way, what are the correct investor behaviors for us to consider? This is where Principle #3, Discipline, fits in nicely. Discipline means doing the things that have always worked and avoiding trying things have haven’t worked (thinking this time will be different).
Let’s delve into the concept of Discipline in more detail:
- Discipline is recognizing that your single best opportunities rest with owning the great, well-run companies of America (as well as the great companies overseas). This is because great, well-run companies continually innovate, surmount obstacles, and develop workarounds to make profits;
- Discipline is continuing to diversify your ownership of the great companies, so that no single company’s misfortunes can seriously cripple your long-term financial well-being;
- Discipline is buying more shares of your great companies during market corrections when prices are lower, netting you more shares;
- Discipline is buying more shares systematically every month, taking advantage of the concept called Dollar-Cost-Averaging;
- Discipline is holding on to the shares you own, even if you do not have cash to buy more shares during the correction. The shares you own now may have gone down in price but if you hang onto the shares they will be inevitably be worth more in the future;
- Discipline is avoiding the temptation to cash in your chips (i.e., sell your shares) out of fear that you might lose them all. Remember, during the correction you haven’t lost any shares, let alone all of them. The current value of the shares you own are simply temporarily worth less than before.
- Discipline is also avoiding the temptation to cash in your chips—temporarily—until the correction is over and then rebuy. This temptation is especially sinister because it seems so logical: if the market is still heading down, why not sit out until it’s done and then get back in? The short answer is that it is highly unlikely that you will be able to rebuy shares in the future at prices that are lower than today’s, thereby ending up with less money than if you had simply hung on. The long answer is beyond the scope of this newsletter, but I’d be happy to have the longer conversation with you if you are feeling the urge to try this scenario.Hang in there. JR