We Have A Market Selloff. Now What?

Please refer to Important Disclosure Information at the end of this research note.

Market advice is over-rated because the advice is rarely divorced from the adviser’s incentives: 

  • Your financial adviser is likely urging you to “stay the course” or “buy the dip” because they can’t afford to lose your investment dollars.
  • Traders are screaming “sell” because that's what they do: sell when the market's falling and buy when its going up.  
  • Erudite market prognosticators are saying “buy” but “tread carefully,” which is neither here nor there.   

A few weeks ago I was at the Columbia University Investment Conference.  Howard Marks (Oaktree) and Keith Meister (Corvex), both brilliant investors, were the keynote speakers. If you want to learn more about Mr. Marks’ views I highly recommend reading Howard Marks: What Does the Falling Market Know?

My takeaway from the conference was while there are many market concerns, they are well-articulated and hopefully well known.  The real worry, in my mind, is the unknown unknowns because that’s what’s not priced into asset prices yet.

The other worry is that market participants by sheer force of will could pull the world down into a deep recession. If company executives see their own 401(k) savings diminish in value and react by pulling back on loans and corporate investments that could create a negative feedback loop.  

 

So now what?

If you’re a passive investor, owning a basket of stocks through ETFs or diversified mutual funds, the decision to buy or sell can be hard. Is your portfolio over- or under-valued? Is this 2008 or 2011?

If you own a basket of stocks of a few businesses you know well, it’s easier to make an informed decision backed by sound analysis.  You can at least attempt to answer these questions:

  • What is your business’s capital structure?
  • Are there any near-term debts maturing that may require a large capital injection?
  • Is your stock down a lot because it’s a equity sliver that sits behind a mountain of debt (read: The Allure of the Equity Stub)
  • Are there any sovereign wealth funds who own your stocks and who are being forced to liquidate due to the strong dollar creating non-fundamental pressure?
  • Do you own expensive momentum stocks that outperformed in 2015 and now appear vulnerable?

 

If the market's closed for the next five years, are you still willing to own the business?

The bright side of market selloffs is it forces us to sharpen our pencils and find those businesses we really like because they have extraordinary risk/rewards and the selloff gives us the opportunity to own more shares of businesses we love.

There are no shortcuts.

 

One final note

It’s worth noting that there’s at least one asset class that’s outperforming today in this market - Cash.

 

Important Disclosure Information

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