Corrections are Buying Opportunities
Since 1980, the S&P 500 has registered at least one significant drop in value every year. During those four decades, the average drop per year is 14.3%. Let me highlight that: every year since 1980, the S&P 500 has had an intra-year decrease in value on average of 14.3%. This drop is frequently referred to as a Correction[i]. Corrections are no fun. They keep people up at night worrying about their investments. What in the heck is going on this time? Is this time different? My Certificates of Deposits do not correct. My savings accounts do not correct. My mortgage does not correct. Why is it that my portfolio has corrections?
The real story is that these incidents are entirely natural. Markets fluctuate. The reasons behind these little market fits are mostly irrelevant. They are not predictable, they are not consistent, and most importantly, they are not permanent. We only lose money if we panic and sell. A temporary, unrecognized loss will remain just that, if we remain quiet and do nothing.
Corrections and volatility are essential to investing in stocks. The volatility we experience is the very reason why we are paid a premium over other non-volatile investments like CD’s & Savings Accounts. (If there were no risk, there would be no return—and we want our premium returns.)
Think of a correction as if you’re driving to the beach; it’s a nice summer day; you glance down at your speedometer and realize that your speed has crept up to over 70 MPH. And you’re on a 55 MPH road. Worse yet, maybe you’re approaching the crossover at the MSP Berlin Barrack, and from past experiences, you know they always work radar there. Not wanting to send the State of Maryland another $75, you ease off some pressure on your right foot and slow to 55 MPH. You just made a 21% correction.
What has happened? After reducing your speed, you did not disgustedly stop the car and walk the rest of the way. You did not turn around, forget your vacation and go home. Nor did you give up on cars as “too risky” and start taking buses. Basically, the only thing that changed is that you might arrive at your destination a few minutes later than if you had stayed barrelling along at 70. And you might have saved yourself an impromptu meeting with one of Maryland’s finest.
Back to our market correction, we must point out the silver lining. Unlike slowing your car, market corrections help you make it to your investment destination faster. Like most things in life, it is not what happens to you; it is how you deal with events that really matter. By changing our thought pattern (attitude) to see “corrections” not as a negative thing but as an opportunity, we make a world of difference in our ultimate investing outcome.
Look at the year 2020 during March and April. Those 30 to 40 days were the mother of all corrections. Let’s call it THE COVID CORRECTION in all caps. (The S&P was down 34% in 33 days.) What did THE COVID CORRECTION mean to today’s portfolio? Nothing! As in, no portfolios were harmed in the making of that movie.
On the other hand, a lot of good was done for our portfolios. Instead of hunkering down in cash and safety, we should have been, as my father used to say, buying with both hands. And give credit where credit is due; many of us were.
Just a quick example. Exxon/Mobile, or ticker XOM, sold for as low as $30.11 in March 2020. $30 bucks a share for one of the safest and most profitable companies in the history of companies. And like icing on the cake, they were paying a dividend of 87 cents per share every three months. $30 a share and 11.6% dividend stocks don’t come around that often.
So let us imagine we scraped together $3,011, and we bought 100 XOM shares. In May, August, and November of 2020, and then in February, May, and August of 2021, the holders of those 100 shares received $87 in dividends. Six dividend payments of $87, or $522 total just for owning XOM. And today, as I write this, XOM is selling for about $55 per share. Our hypothetical 100 shares would be worth $5,500. And we would have $522 in cash. But wait, there’s more! If we had reinvested those dividends, we would have at least 110 shares. Now our dividends, are making dividends. Nirvana! When the compounding train is rolling down the tracks, all we need to do is stay out of the way.
Exxon Mobil Corporation is one easily recognizable example. Last year, almost every investment was working. It was a fantastic year in the markets. And the folks disciplined enough to buy during those 30 to 40 days in the spring made a lot of money. Contrary to common sense, equity markets suffered record cash outflows. Instead of buying with both hands, many investors threw in the towel and left. They left their car on the side of Rt. 50 and walked home.
If there is a secret to winning in the investment world—it is this, never panic, stay invested, and buy when you can. You will win. There are just too many ways to win and only one way to lose.
Now, look, everyone worries when we have corrections. Yes, even I worry—a lot. Ask my dog, she is not always sure when the markets go up, but she indeed senses when the markets are down (and she has no investments with us.) But these things are as natural as spring rain.
Here is an exercise to prove our point. Do an internet search for any “historical chart of the S&P 500” or the DJIA or the Nasdaq. Then point to a random date about 40 years ago and compare that number to today’s average. Why would we think the future would be any different? The markets have a long history—and it has been a history of creating wealth.
Whenever we have the money, we want to be buying—when we see these corrections, we want to be buying more! Thanks for reading, and as always, give us a call if you have any questions or concerns; I welcome your comments at mknight@chesadvisors.com.
MK
[i] Investopedia defines a Correction as: “. . .a decline of 10% or more in the price of a serucity from its most recent peak. Corrections can happen to individual assets, like an individual stock or bond, or to an index measuring a group of assets.” https://www.investopedia.com/terms/c/correction.asp
