Like many of you, we are attuned to the recent stock market gyrations and the seemingly intractable problems that confront us globally.
At moments like this, it’s easy to be pessimistic, but it’s equally important not to let the pessimism consume you.
In fact, 10% corrections are routine in any market cycle. The investors who have done well over time learn to live with market uncertainty.
The Right Market Psychology
As humans, we tend to remember the agony of defeat longer than we remember the thrill of victory.
That’s relevant today because there are many otherwise thoughtful people who are abandoning their long-term strategy of being in well-diversified portfolios. Despite the extreme fluctuations of the last few weeks, we think that is a strategy mistake.
Many are viewing this quarter as a repeat of 2008. Somewhere deep down they told themselves that when they get that feeling again about getting out the market, they would act on it to avoid the pain.
What’s Different This Time?
We believe those who are selling everything are missing a key difference between now and then: Leverage in the financial system.
If you recall, during the crisis many financial companies were levered 30+ times against a real estate market that was falling fast. The overextended balance sheets of some of the nation’s leading financial institutions precipitated an earnings collapse that took the stock market with it.
While we understand that the Fed has been stabilizing the economy, the actual economic data is truly getting better – at least in the U.S.
We view the current stock market volatility the same way we view the first rainstorm of the season.
It’s cold and unpleasant, but also a part of the cycle that cleanses the air and reminds us that regardless of how many days of sunny weather, another rainstorm eventually appears on the horizon.
We will be here, tiptoeing through the raindrops as we always do.