The market has just lost almost 10% in just over a week. If you go to your local market to buy vegetables and from one week to the next your regular vendor says: "By the way, I screwed up my price for lettuce last week. From now on, I'll sell it for 2.00 instead of 2.20". Now you'd think it's nice to pay less, but this shopkeeper has no idea what he's doing. Above all, you'd think you'd been screwed for quite a while. In any case, it's a far cry from the image of a rational, efficient salesperson. Yet that's what some people think of the financial markets.
How can we justify the fact that, from one week to the next, companies in developed countries are losing 10% of their value? We can try to explain it by the fact that US long rates have risen, making long-dated bond investments more attractive. Investors act by comparison, constantly trying to adjust profitability and risk. As bond yields were previously insignificant, they had no choice but to fall back on equities, driving them to the top. But as soon as long bonds start to yield a little more, there's a trade-off between them and equities, and the latter start to lose value. And yet the yield differential wasn't really that great...
By reasoning in this way, we give ourselves the illusion that we're still in the realm of the rational. But this is totally absurd. You don't buy one good for more than it's worth because the other good is also too expensive. If your market-gardener's lettuce and tomatoes are overpriced, you either change merchants, buy carrots, or don't buy anything at all and finish off your stock of potatoes in the cellar.
The other explanation is even dumber. The market has fallen because the economy is doing well. Wages are rising, and so rates are expected to rise. In fact, for the supposedly rational Mr. Market, companies should be losing money so that wages don't move and the central bank injects liquidity. At that point, the Fed might as well print greenbacks and give them directly to traders. No need for intermediaries!
Nothing has changed. Share prices were totally disconnected from reality at the end of January 2018. The 10% drop is absurd; the market could just as easily still have gained 10%, stagnated, lost 20%, or even much more. In fact, today's prices are hardly any better than they were ten days ago. Traders are getting very excited at the moment, and the only winners are the financial intermediaries who are reaping the rewards of their commissions. There's no more reason to buy or sell today than there was a week ago. Companies are big boats that can't change in such a short space of time.
So let's leave all this excitement behind and focus on the only thing that matters: results.
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Excellent post! Perfectly sums up my feelings over the last few days. Well done Jérôme, keep it up.
Thank you DSwissK 😉
That's it jêrome, you just need to have enough liquidity to cope and better make a few sales.
Ask for an advance on life insurance to make a few cash balances in case the downturn worsens.
And, as always, the conclusion is the same: focus on the company, not the market!
I'd like to take this opportunity to point out that there is a lot of talk these days about a possible return of inflation. If inflation rises, central banks will undoubtedly raise their rates too. Moreover, inflation is the enemy of cash; holding shares - of good companies - provides a little protection.
Just right! And a little gold.
Bond rates, inflation, the dollar and algorithmic trading: the media are always looking for explanations for why the stock market is falling. Rather than simply saying that stocks are falling because they climbed too high too fast! It's a bit less salesy, of course, and you might be forgiven for wondering what the media's purpose is...
To support their shareholders
An excellent DGI post in the same vein:
http://www.dividendgrowthinvestor.com/2018/02/your-future-retirement-income-is-on-sale.html?m=1
"Your future retirement income is on sale
The stock market has finally started going down. This is great news for those investors, who are in the accumulation phase. When you are able to purchase shares are lower entry prices, you end up purchasing future dividend income on sale. Investors in the accumulation phase should therefore be praying for lower prices during their work careers.
Retirees should ignore stock price fluctuations and focus on their dividend checks. This is where it pays to focus on dividend dependability for each company you bought in the first place.
Intelligent dividend investors view stocks as partial ownership shares of real businesses. They do their research in uncovering those businesses, and then try to buy existing owners out at bargain prices. They can then sit back, monitor their business interests, and collect dividends one check at a time. After all, if you owned an apartment building next to a college that is always occupied, you won't give a damn if their quoted valued fell by 5% - 10%- 20% in one single day. As long as you can rent your building out, you should do just fine by ignoring "quoted values".
(…)
It is important to stick to the plan of earning money, saving money and investing money on a regular basis, and staying the course through thick or thin. As you can imagine, long-term investing is a marathon, not a sprint. This is why it is important to keep investing for years, while building out that cash machine."
Yes, that's true. But the market is still too expensive...
"The worst of the sell-off began last Friday, when data on wages showed that inflation may be picking up and could prompt the Federal Reserve to combat it with higher interest rates. It was amplified this week by so-called target volatility funds that rushed to sell stocks and buy protection against higher volatility."
The last sentence explains a lot... It's exactly because of this kind of fund that the market is inefficient. Long may it last 🙂 !!!!
Another well-written article on the importance of ignoring market fluctuations:
http://www.mrfreeat33.com/recent-stock-market-volatility-does-it-matter-to-a-dividend-growth-investor-living-off-of-dividend-income/
Excellent indeed!