What happens after big stock market declines?
Unquestionably, this has been a difficult year for almost everyone who is invested in the stock market and for our managed accounts. So, what has really changed? We know there are new tariffs, but we are close to full employment and the economy appears strong.
Selling stocks starts with fear and as the fear grows the selling increases. It does not matter whether the fears are valid or unfounded, the effect is the same. Selling begets selling. It drives prices down and this creates more fear. It is not uncommon for Institutions, i.e. mutual funds, pension funds, etc., to hold 50% or 60% of the outstanding shares of a company. The managers running these funds, are not sitting in their austere offices making calm, pragmatic decisions to sell. They are often under huge pressure by their Boards to dump stocks when the general market is falling. Earnings growth and financial stability are not under consideration when these pressured selling decisions are made. The managers simply give an order to sell blocks of stock.
History tells us that every few years we go through a drop similar to this. These drops end with a whimper and without fanfare. Then stocks begin to rise. A good friend of ours, Bob, who has been a money manager for both bank trust departments and as an independent financial advisor, once asked me a question. He said, “Do you know what happens after the market takes a big fall?” Then he answered his own question, “The stock market quietly starts climbing and ultimately goes on to make new highs!”
We will be raising some more cash, partly to be defensive, but, also, because we believe there will be huge opportunity over the next several months. While this is a time when people worry, it is also a time to ferret out companies which offer exceptional promise. We believe several of the companies we currently hold are among these.
Ask yourself some questions. Have these companies stopped making money? Are the goods and services they offer no longer needed or wanted? We are convinced that a portfolio of high quality, growing companies works over time, and our managed accounts have a long history, which demonstrates this.
All declines in the overall market end – this too shall pass!
P.S. Please know that Ben and I are available if you would like to call or set up an appointment to discuss your account.