This is the question that all long-term investors are asking themselves or their advisors. For most companies that comprise “the market” this correction began in mid-November 2021, a little more than 7 months ago. But for some companies (namely, “growth” companies) their correction is now approaching the 1-year mark.
The last two weeks saw a major decline in the market indexes, the third leg of major declines since last autumn. Referencing the SP500 Index, the first decline of 13% lasted 70 days before rallying for 11% over 15 days. The second decline of 16% lasted 52 days before rallying 7% over 19 days. The current decline of 12% is now 9 days old.
Will this third leg be the last leg of declines? Does this mark the bottom?
The correct answer is “it may be the bottom, or it may not be the bottom.” I don’t know, nor does any investment adviser or market guru know if this is the bottom or when the bottom will be reached. But rest assured that there will be a bottom sooner or later because there has always been a bottom to all previous corrections.
The equity market goes down as much and for as long as it needs to before (1) sellers will prefer to keep their too-low equity shares instead trading them for cash and (2) buyers will prefer to trade their cash to own too-low equity shares. As this happens, a bottom forms and rallies ensue.
Most often, the ensuing rally is strong and deep as the preceding correction. For example, I remember our last inflation/recession-driven correction during 1980-1982, which also had three down legs resulting in an overall decline of 26%. But what I remember most is the 5-year rally that tripled (+223%) following the August 1982 bottom. Once the market reached bottom, the August 1982 rally was fast and ferocious, requiring only 13 weeks to recover back to its previous high point.
As the old saying goes, “they don’t ring a bell at the bottom.” Since they don’t ring a bell, our best bet for enjoying the next big rally is to make sure that we own our shares at the very bottom. The only way to ensure that we will, in fact, own our shares at the bottom is to hang on to the shares we already own and even buy more shares at (what will prove to be down the road) today’s lower prices.
You may remember Peter Lynch, of Fidelity Magellan fame from the 1980’s. One of his most famous quotes is: “The real key to making money in stocks is not to get scared out of them.”
What he meant by that is explained another way by Nick Murray, who I quote often: “The only way to be reasonably sure of capturing (and compounding) the permanent return of equities is to ride out their sometimes significant but always temporary declines.”
Serious money investors are long-term investors with a lifetime plan in place to achieve the long-term historical rates of return that equities have delivered. Staying behaviorally calm during this anxiety-producing correction period is why we deserve the significant long-term rates of return that should inevitably come our way.
You may have noticed a framed quote in the reception area of our office. The quote is from the legendary investor, Shelby Cullom Davis, founder of the Davis family of mutual funds:
“You make most of your money in a bear market, you just don’t realize it at the time.”
This is gut-check time for us. Hang in there. JR