The general bullish attitude seems to be changing into uncertainty as market fear rises. This week the S&P 500 and the Dow Jones took a few punches and plunged to what people are calling the worst performance since 2011.
The weak performance is partly due to concerns over the Ebola outbreak, especially after the announcement of an American nurse who contracted the virus in Dallas, Texas over the weekend. We know this to be true, because of the sudden spike in share price of Lakeland Industries and Alpha Pro, manufacturers of hazmat suits and protective gear. On the other hand, the opposite occurred to airline stocks. The stocks endured a hard hit when the news broke resulting in a major drop in shares. Concerns over the slow economic growth in Europe and China also contributed to the high level of market fear.
It is safe to say the market is heading for a correction and quite frankly, as value investors we can’t be concerned in the least.
What is a Market Correction?
Corrections are temporary price declines interrupting an uptrend in the market or an asset. It is a reverse movement of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation.
How To Survive a Market Correction
A correction can be a stressful time for investors. If you want to survive a correction, the most important thing to remember is to keep a cool, level-headed mindset. You must switch off your emotions and think like a computer. The media is going to make it sound worse than it is and the majority of investors will be doing exactly as expected, which is panic selling their stocks at a loss.
Remember that the majority in most cases are wrong. Don’t follow opinions, trends, or adapt herd mentality. If you are in it for the long run, have trust in your investment choices and let your stocks ride the proverbial market wave.
Diversifying your portfolio globally acts as a buffer against market corrections. Global markets react differently to geopolitical and economic stress. Diversifying your portfolio lowers investment risk, for instance, if one market drops tremendously your portfolio can withstand the stress, because your unaffected diversified stocks will carry you through the tough times.
The Benefits of a Market Correction
It Regulates the Market
The market can’t grow forever. What goes up, must come down. With the exceptional market performance as of late, it has become harder to find value amongst global stocks. A correction will prompt investors to panic-sell their stocks, giving us hope for valuable investment opportunities.
It Creates Buying Opportunities
Although a 10% drop in the stock market sounds unnerving, it holds the opportunity for buying strong businesses at discounted prices. Most investors tend to sell at a low when the market goes into a panicked state, because they fear losing all of their money. When this happens we, 3D value investors, step in to buy discounted shares of only the strongest companies. The global market will eventually stabilise and our newly bought shares will once again soar. We will patiently wait until it reaches our target exit point and at that moment we sell our shares making a phenomenal profit.
3D Value Investors Welcome Market Fluctuation
As 3D value investors we only buy businesses with strong fundamentals, trading at less than its intrinsic value. We buy great stocks at wonderful prices. The upside to buying these type of companies is that we need not worry about a market correction, because we are confident that our investments can withstand market fluctuation and return stronger than ever before. A strong business will be affected by a correction, but will be trading at its normal rate soon after the markets have stabilised.
Who better than Warren Buffett to sum this up:
“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Imagine how many times during the volatile 20th century investors saw something they didn’t understand, panicked and acted out of fear, only to buy or sell at the wrong time. Assuming they bought discounted value stocks, and had the patience to sit it out, those businesses would have done the hard work for them.
Short-term traders, on the other hand, will be the ones panicking, selling low and buying high. Ron Weiner, founder, president and CEO of RDM Financial Group, shared his wisdom with USA TODAY. He had the following to say: “Short-term, human beings have a unique built-in mechanism that, left to their emotions, they will almost always buy high and sell low. That is the normal visceral reaction. Investors that want to buy low and sell high are the ones that go against their human nature.”
Regardless of fear, hype and short-term market fluctuations, solid businesses demonstrating substantial strengths have proven to come good in the end. If we should trust anything it should be these value stocks: trust in fair value and trust that the market will reflect that value in the long term.
By following the principles of 3D Value Investing, you will outperform the market even in times of a correction. STRIDE has proven it. We have designed a backtester graph that shows our performance since 2000 to 2009. See how STRIDE performed against the S&P 500 and generated 19.25% annualised returns year after year.
With the correct investing principles, strategy and investing software you can become a successful independent investor; one that doesn’t have to worry about market corrections.
Learn how to become a 3D Value Investor by downloading our free eBook.