What do you think of when you hear the phrase stock market correction?
If the major media is to be believed, a stock market correction is akin to Armageddon. The sky is falling, etc, etc.
Truth be told, stock market geniuses like Billionaire Warren Buffett see corrections as a fabulous thing. It’s the flip side of a rally, nothing more, nothing less. In theory, corrections adjust equity prices to their actual value or “support levels”. In reality, it is much simpler than that. Prices fall when the market runs out of buyers. If you have cash you can pick up all kinds of bargains. Buffett hoarded his cash as the market got pricey because he said, he couldn’t find anything of value to purchase. In other words he knew the market was overpriced and so he hoarded his cash waiting for prices to come down… as he knew they would.
Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. Warren Buffett
Here’s a list of 8 things to do during a stock market correction.
Study the past:
Corrections always lead to buying opportunities, so begin collecting a diverse group of high quality, dividend paying, NYSE companies when their prices drop. You will never be able to buy consistently at the bottom and sell at the exact top. So stop trying. Good traders are happy to get into a trade within 20% of the bottom and get out within 20% of the top. Long term investors like Buffet don’t even try to do that.
Our favorite holding period is forever. Warren Buffett
If you are buying quality equities for the long run as Buffett does, minor (or even major) downturns are simply opportunities to buy at a discount. This philosophy has served him well. Peter Doyle once said, “Berkshire Hathaway sits on $45 billion of cash and generates about $5.2 billion of cash flow annually, … Berkshire and Warren Buffett have really become the lender of last resort or the buyer of last resort of many assets. And I think he’s going to pick up great assets at very distressed prices going forward.”
Focus On Your Long-Term Objectives.
Almost three years ago, Buffett offered GE cash when they needed it most and the terms were in Buffett’s favor. Now GE is looking to close out the deal later this year so they don’t have to continue to pay 10% a year to Buffett’s Berkshire Hathaway(BRK.A). By the time they close, the preferred GE shares will have earned Buffett $900 million in dividends. But he also received warrants giving him the right to buy $3 billion in additional stock at $22.25 before October 2013. GE stock is currently trading at around $15.50 well below the value on the day Buffett struck his deal. So is he worried?
He once said he,
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
So he focuses on the long term. The question on this trade is whether he gave himself enough time. Will the price of GE stock rise above $22.25 within the next 2+ years? Interestingly in the six months after Buffett inked this deal GE stock fell an additional 75% and hit an 18-year low below $6 before rebounding to current levels.
Don’t Buy on Emotion
Hope for a short decline, but prepare for a long one. There’s more to this strategy than meets the eye, most of us don’t have $45 billion sitting around like Buffet so you don’t wish to run out of money prior to the beginning of a new rally. If Buffett had been subject to emotion he may have second guessed his GE deal as he watched prices decline for six more months after he bought but he held fast.
“What people do is let their emotions get the best of them when they buy and sell. People often make the mistake of buying stocks only after they go up and not when they are bargains. There is a quote from Warren Buffett that Americans like to buy everything on sale except stocks.” Pat Dorsey
Continually examine the performance of your portfolio and watch your capital.
Keep in mind that corrections (of all kinds) will vary in depth and duration.
They don’t turn out to be obvious until long after the fact. The short and deep ones are the best buying opportunities; the long and slow ones are uglier and tend to grind investors to dust.
Unlike many points in life, Stock Market realities need to be dealt with rapidly, decisively, and with zero regret. Take the action you need to take based on the facts at hand. Simply remember: there has never been a correction that has not succumbed to the next rally or a rally that has not succumbed to a correction.
Value, Value, Value:
Price is what you pay. Value is what you get. Buffett
Carpe Diem- Seize the Day
Corrections should be seen as opportunities to buy at a discount such as Buffett’s $3 Billion GE investment. And more recently when he offered $5 Billion to bail out Bank of America (BAC) after they had to pay an $8.5 billion settlement with major holders of soured mortgage from Countrywide. On a less grand scale, recently Isaac Dabah former CEO of Gloria Vanderbilt Apparel Corp. and current CEO of Delta Galil corporation, took advantage of the market situation and purchased the assets of KN Karen Neuburger® sleepware. Delta Galil corporation markets Tommy Hilfiger® and Lucky® intimates and is a good match for Neuburger which was often featured as one of Oprah’s “favorite things”. Dabah, said, “I’m a huge fan of the brand and I’m confident in its continued success with Delta Galil. Using our strength in fabric innovation, marketing and distribution, Delta intends to expand the Karen Neuberger brand on a global scale.”
So if like them, you have preserved your capital during the correction, once bargains appear, you will will be positioned to “seize the day”.
Best of Luck.