Hello everybody and hope this email finds you well. I thought today would be a great day to write,
speak, and tell the town crier to start telling everyone ALL IS WELL!
So, I know some of you are already asking yourself “Why is Brad wanting to scream all is well? Isn’t the
market going to crash like I read in in a recent publication somewhere? Or maybe it was the email that
said I should go all to gold? Or was it the pundit on TV saying the sky is falling?”
It is the point of this letter to hopefully shed some light on what I think could develop into a wonderful
opportunity.
What is a market correction? As I type this the S&P 500 is currently shedding a 1.75%. Yup...a whole
1.75%. I hope you are saying to yourself so what? However, if you look at the news, read anonymous
emails, look at chicken entrails, you might think the world is ending. It is not. In fact, the world looks
rather good from my viewpoint. Let’s dive in.
I want to first start very basic. What is a market correction and what is a bear market?
Statistically speaking, a market correction is defined as when an index (say the S&P 500) declines by
more than ten percent but less than 20% from its most recent peak. Corrections earned their name
because typically corrections involve simply just that...the market corrects, and prices return to the
upward trend.
Many may be asking... “But Brad, don’t market corrections actually start bear markets?” Since 1974,
there have been 24 market corrections and only 5 of these corrections turned into bear markets (1980,
1987, 2000, 2007, and 2020). I want to narrow this down a bit to this recent bull market run we have
been in which started in 2009. There has been a total of 6 times where the market corrected before
continuing to march upward. In 2010 (15.65%), 2011 (18.6%), 2015 (12%), 2016 (13%), 2018 (10.1%),
and the covid correction of ‘20 (19.4%). As you can see, corrections are common. The markets drop on
average 3 times a year by 5% or more. About once a year it will fall 10%. Once every 3.5 years it will fall
15%. And that dreaded bear market will roar once every 6 to 6.5 years. They happen. I say thank you!
“Pump the brakes Brad...Thank you? What are you talking about?”
When I see a correction, I see an opportunity. As many of you have seen, we hold stock and several
great companies. When there is a market correction, these great companies fall just like the others.
What I see is a giant SALE sign in the window. What we do at Redfish Capital is use the dividends and
interest received from our investments to build up our money market accounts. When the market
correction, or opportunity arises, we use that capital to increase the number of shares we have in those
companies.
You have also noticed that I use market runs to sell into the strength. If stock XYZ has doubled in value, I
tend to sell some shares for investors. Pretend you invested $10,000 in XYZ and one year later XYZ is
worth $20,000. I would typically sell close to $10,000 of that gain and place it in the money market
account for you. Now what happens if XYZ goes to $0.00? You lost none of your capital. Honestly, if
XYZ then went to zero I would be kicking myself for not selling all of it but this is just a silly example top
prove a point. Most likely, XYZ would come down some at some point and then continue to run. Great.
We are making more. But the risk to your investment capital has been mitigated by the taking of profits.
This is a win. Now let that sucker run because now it all profit for you.
So in addition to the dividends and interest we also have sales proceeds sitting in the money market.
Now I can either add more to great companies you already own or finally take advantage of companies
that I have wanted to own but missed. They got to be too expensive for me to buy comfortably. So I
had to wait and now I have my opportunity.
So why now?
Corrections tend to occur when markets are running and we certainly have been doing that. IN spite of
that however there are four factors that may be starting the why now. First there is what we can
seasonality. Simply speaking, the months of September and October are tough in the markets. Second,
the Federal Reserve Board will be discussing slowing down the Treasury asset purchases (aka tapering)
which would slow the economy. Third is the Delta strain of Covid peaking (which I see as positive).
Finally, fourth, is China and specifically a company called Evergrande. Evergrande is a real estate
developer in China that has 1300 projects underway in 28 cities.. They also currently has over $300
billion in debt. Over the weekend they hinted that they may default on that debt. $300 billion is a
HUGE number that would strain the financial system in China. The Chinese Government has mentioned
and shown that they are loath to step in and intervene. The combination of these four items I think
could start a downturn.
So today I am writing to emphasize that the market MIGHT start correcting. In fact, I am hoping that it
does. I would love to see a nice 10%er. This is what I want and frankly so should you. I want buy new
positions in a few companies that I really like but they just seem to be too expensive in here for me. I
would love to ADD to others that I like for you...they are just too expensive right now. A nice correction
would give me that shot I want at these companies. Granted, I realize that a 10% decline would hurt
returns for now but let’s face it...the markets are up nearly 18% on the year...that’s a big number! Ten
percent less still has us is great return territory and after corrections, as pointed out, tend to run
stronger than before.
In closing I want to remind you that I understand that these corrections seem scary. I get it. I really do.
I used to tease people all the time that during times of massive market volitility I tend to sleep like a
baby. I wake up several times a night crying. But that is in jest. The good news is that for long term
investors, who own great names, we get a gift. If you are young, you are really LUCKY to get a
correction. Use it to your advantage! When great names go on sale it’s time to start buying.
Redfish Capital Management, LLC is registered as an investment adviser with the State of Texas and only transacts business in states where it is
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developed from sources believed to be accurate and should not be regarded as a complete analysis of the subjects discussed. All expressions of
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