Over the last few weeks stocks have fallen at a historically record pace. Dropping from previous highs by more than 10% at a faster rate than any time in modern history. These sorts of market moves can be emotionally gut-wrenching. It can trigger fight or flight instincts that make us want to stop the pain or sell in fear of greater losses.
Those human instincts are working against you as an investor. Those instincts are a big reason why average investors woefully underperform markets over time. Those human instincts are a big part of why WSCO clients outperformed more than 82% of retail investors in 2019.
A market correction is a time for cool, and dispassionate rationality.
Some more of my thoughts…
- A Correction Was Expected – In 2019 global stocks returned almost +27% for the calendar year. There had not been a pullback in the stock market of 10% or more (a correction) since 2018. Historically stocks experience a 10% pullback about once every 12 months.
- Average Returns aren’t Average – Most investors are aware that over long-term periods stocks tend to return around +10% annually. It’s rare for stocks to return +10% in a year. Stocks tend to charge forward, pullback, reset, and charge again. This is caused by the supply & demand functionality of the markets.
- Be a QB – When a correction or bear market occurs, it is easy for us to think that we should have or could have seen this coming. Do not do that. You, and no one for that matter can accurately time a sharp market correction like this. Instead be that quarterback that threw an interception on the last possession, and then in the next possession marches his team down the field to score the game winning TD. Be confident and stick to the game-plan.
- Things Looked a Little Overpriced, Now Not So Much – Until the market correction US stocks were above 18.5x forward price to earnings. Today US stocks are at 16.55x forward price to earnings. Much more attractive.
- It’s Baked In – The market is a discounter of all known information. There will certainly be more negative and positive surprises to come. The economic impact of Coronavirus is mostly baked in.
- The Market Goes Up – The stock market will recover from this current drop. At some point this correction will be a little blip in the chart of the stock market’s endless climb to new all-time highs. This was the case with the Ebola, SARS, and countless other corrections, and it will be again.
Conclusion:
During market corrections like this there is an urge to do something, but the right move is almost always to hold tight and wait for the storm to pass.
A few details on the Coronavirus:
As of Feb 29th, the World Health Organization reported over 85,000 cased of Coronavirus worldwide, with roughly 79,000 of those cases in China. As of Feb 11th, mortality rate for those under 40 was 0.2%, 0.9% 40 to 59 and 6% for those over 60 years age.
This is much more lethal than the typical flu outbreak which has a mortality rate of 0.1%. However, it is much less lethal that other “recent” pandemics. Ebola had a 90% mortality rate and SARS was 11%.
– Wyatt Swartz
– 3/3/2020