Updated: Aug 9, 2022
Hello everybody and hope this post 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.
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 in several companies that I believe in. When there is a market correction, these 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 original investment. 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 to prove a point.
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 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 call 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 280 cities. They also currently have 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 not always willing 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.