Why I’m Hoping For a Market Correction

Everywhere I go these days, the same question seems to weigh on investors’ minds.

“Don’t you think this market is overdue for a correction?”

I always answer the same way: I sure hope so.

“But don’t you own stocks?” they typically reply, with a look of puzzlement.

Of course.

“So why would you root for a correction?”

[ad#Google Adsense 336×280-IA]Let me count the ways.

According to InvesTech Research, since 1932 there have been market declines of 10% to 20% – the traditional definition of a correction – approximately every two years.

We haven’t had one since October 2011.

(Although we came close in 2012.)

In that sense, yes, we are overdue.

But should a market correction scare you? Stocks go up and stocks go down. Then they go back up again.

I hate to be the skunk at the garden party, but anyone who sees falling stock prices as an opportunity to sell rather than buy has a tough road ahead of them.

The problem, of course, is that while investors can imagine a sell-off, they can never imagine the actual news backdrop that accompanies it.

“I never imagined that this would happen,” they say. This, of course, is something different each time.

Nor are they prepared for the merchants of doom who come out of the woodwork to exclaim that each bump in the road is the beginning of the end.

I work in an industry that knows there is good money in scaring the pants off people. (Unfortunately, it isn’t terribly helpful to the pantless… who fear losing their shirts.)

Corrections and full-blown bear markets – declines of 20% or more – are what equity investing is all about. They are your ideal buying opportunities.

If you could earn equity-like returns with an account balance that rises as smoothly as a passbook savings account – which hardly rises at all at current rates – everyone would be fully invested in stocks.

In other words, you’re well compensated for the occasional sleepless night.

Personally, market sell-offs have never bothered me. Every time great companies fall into the bargain-basement bin, I get an adrenalin surge, rub my hands together and start buying.

Apparently, this is a contradiction of human nature, but I seem to come by it naturally. I just can’t pass up a great deal. (Credit my Scottish blood.) Witness this recent conversation between my wife and me:

Me: Honey, I was able to buy these two 50-lb bags of cat food today for 75% off!

Wife: But we don’t own any cats.

Me: You’re not hearing me. They were 75% off!

Just kidding. We actually do have two cats. Would you like two cats? (Not kidding. I’m a dog person with cats. Blame it on the kids, who favor small, fluffy creatures that ignore them.)

But back to my point. You should welcome a correction, not fear one. (Even if you’re using a 25% trailing stop on your individual stocks, a correction generally results in no harm, no foul.)

Every great investor recognizes this. Benjamin Graham, Warren Buffett, John Templeton and Peter Lynch all made a habit of buying the dips.

Graham said, “Buy when most people… including experts… are pessimistic.”

Templeton said, “When people are eager to sell, I accommodate them by buying.”

Buffett said, “You want to be very fearful when people are greedy and very greedy when people are fearful.”

Lynch said, “I’ve found that when the market is going down and you buy, at some point in the future you will be happy. You won’t get there by reading ‘Now is the time to buy.’”

Yet the average investor – who acts emotionally rather than rationally – does just the opposite.

It’s a shame really – because there is one prerequisite for selling high.

It’s called buying low.

Good investing,

Alex

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Source: Investment U