Steep corrections on stock markets offer a good reminder about keeping emotions in check. They also present a good opportunity to pick up cheaper stocks.
Sir John Templeton, credited with pioneering international investing, knew the value of keeping emotions well in check. His philosophy was to buy up investments at the point of maximum pessimism. Or to put it less delicately, as Baron Rothschild of the investing family is credited with famously putting it: The time to buy is when there’s blood on the streets.
Now, it’s a bit of a stretch to expect the average equity investor to remember to Keep Calm and Carry On during any market upset, whether it results from the UK vote to leave the European Union or worries that China’s economy will come in for a ‘hard landing.’ A lot of people have a great deal of difficulty keeping cool as they watch their favourite stocks tumble by 10 or 15 per cent.
And that results in people thinking they must bail before everything hits zero. Big mistake.
“You have to keep your head and realize this happens all the time,” said John Stephenson, CEO of Stephenson and Co. Capital Management Inc.
In fact, some would say that if you can’t stomach a 20 per cent correction on the stock market, you should not be in equities.
“If you hold stocks in your portfolio, hopefully for anything longer than an hour, you know they can move around so you have to be comfortable with this kind of uncertainty and realize that (you buy stocks) because they are a long term call, if you will, on global growth.”
Stephenson pointed out that markets don’t go straight up – and they don’t go straight down. Markets periodically look for a level of support whether on the way up or down. This is especially so when markets or economies surge over a period of time.
Unfortunately, investors still bear the scars of the 2008 financial collapse, leading to the wrong conclusion that the latest bout of market volatility automatically signals another meltdown. It doesn’t.
For example, the fallout from the U.K. referendum in which the Leave side won will carry on for some time. And no one knew in the immediate aftermath of the vote just how long the exit process would take.
In other volatile moves in recent years, we saw that the trigger for the mid-2015 correction was China. Its economy had grown by double digits in the first decade of the 21st century and was still outperforming other economies, with growth coming in at a still respectable seven per cent or so.
But a couple of subpar economic reports persuaded investors that the wheels were falling off the world’s second largest economy.
And a further collapse in oil prices to fresh multi-year lows helped trigger a selloff on the Toronto Stock Exchange in January, 2016. After starting the year at 13,000, market volatility pushed the benchmark down to about 11,800 before bottoming out and rising to 14,000 by mid-year, demonstrating the folly of cashing out in January during the worst weeks of the selloff.
And stock investors should remember that history is on their side.
“The reality is, and academic literature has supported this, when you look at all possible asset classes, real estate, stocks, bonds, commodities, jewelry, when you throw it all in there, stocks is the highest returning sector – period – over lengthy periods of time,” observed Stephenson.
“However, there is more volatility associated with it than other asset classes.”
Now, it may not be easy to view these market gyrations as good times to buy – but Stephenson said that indeed is what these events represent.
“They are buying opportunities,” he said.
“Stick to your discipline, buy in dips, sell on strength.”