Don’t Be Afraid Of Corrections
The past ten to fifteen years we have seen multiple corrections and bear markets. If you allow the market gyrations to change your behavior based upon emotion rather than logic you will be more likely to lose money.
The key to getting control of your emotions is to look at what’s really going on in individual stocks and ignore the chatter and noise of the market that goes on each day.
This is hard to do sometimes, I’ve noticed that I sometimes get too worked up about this noise only to miss the mid to longer term trends that are going on in companies that I own or might want to own.
The fact still remains that earnings drive stock prices. It’s all about earnings, and to a large degree the quality, growth and sustainability of those earnings. As much as you may want to consider macro issues, government policy or regulation or whatever in your thinking these issues don’t directly drive stock prices longer term.
What All The Noise Is About
There is a large segment of the stock market that is economically sensitive. Small changes in the macro picture can affect these cyclical stocks because they depend upon growth of markets to drive additional business. For example, if housing and construction is growing, Caterpillar (CAT) will see more demand for equipment because more ground is being dug up. CAT has been doing great recently because of international growth not domestic market growth. But even just a whisper that China will slow down a bit is enough to cause downside in stock as we have seen recently.
The longer term picture? Well, CAT is trading higher than before the recession and until the recent meltdown had traded at all time highs. It’s still trading higher than it 2007 high of about $80. So the lesson is that the past 5 years the company has improved its overall earning and revenue and the stock price reflects that. If you get caught up in the moment you may ignore or fail to see that longer term view of the company.
The stock market is actually more orderly over longer periods of time than it gets credit for.
All Time Highs
There are many stocks that are at or near all time highs or have come off of all time highs. CAT is only one example, there are many others such as those common corporate stocks that are in my portfolio. The most economically sensitive stock in my portfolio is Paychex (PAYX), which is well below it’s pre-recession price but I bought this stock fully knowing that it will require a growing economy to get back to its former glory. I don’t have a problem with this, I will collect an over 4% dividend while I wait.
The reason for new all time highs? Earnings! It’s sounds like a drumbeat but it’s worth repeating.