A few weeks ago, there was a lot of talk about whether or not we’d have a stock market correction. US investors (or, more likely, traders) had lost their collective marbles when they realised the US Federal Reserve wouldn’t leave rates at ‘Bloody hell, we’re in trouble’ level forever. Okay, it wasn’t that cut and dried. Almost, but not quite. The US Fed will likely increase rates slightly faster than those traders had previously imagined, so they went to water. Markets fell. We followed. Predictions of doom abounded. We’ll all be rooned, said Hanrahan. Of course, it didn’t happen. Markets…
You can continue reading this story now by entering your email below
A few weeks ago, there was a lot of talk about whether or not we’d have a stock market correction.
US investors (or, more likely, traders) had lost their collective marbles when they realised the US Federal Reserve wouldn’t leave rates at ‘Bloody hell, we’re in trouble’ level forever.
Okay, it wasn’t that cut and dried. Almost, but not quite. The US Fed will likely increase rates slightly faster than those traders had previously imagined, so they went to water.
Markets fell. We followed. Predictions of doom abounded. We’ll all be rooned, said Hanrahan.
Of course, it didn’t happen.
Markets fell to — shock, horror — October 2017 levels. Yep, we ‘gave up’ 4 months worth of gains.
One third of a year. Less than 1% of your working life.
A few weeks later, and we’re back to December 2017 levels. Add back the dividends that have been declared, and we’re meaningfully above those levels, too.
So much for a crash, calamity, disaster and beginning of the end (depending on which perma-bear you prefer).
Yes, dear Fool, it was going to be a correction. It wasn’t.
Correcting the correction
A correction, as if you didn’t know, is apparently ‘defined’ as the market falling 10% from it’s recent high point. I use quotation marks, because there is no official definition of a stock market correction — it’s just a thing because people decided it would be.
They could have chosen 9% or 11.58%. But humans love round numbers, so someone (who will remain nameless to protect the superficial) decided we needed a name for a 10% fall.
Not to be outdone, my fellow financial services professionals have decided a 20% drop should be called a bear market. Because? Well, because they like round numbers.
I’m sure, like me, you’re thinking that such terms must signify something. That maybe the ASX is run differently at those levels, or that they’re historically significant because they imply something about the future.
It’s a good question to ask, because otherwise, why would we bother with those labels, right?
It is, however, a question without an answer.
Well, that’s not quite true.
The answer is ‘no’.
There is no point, no consequence and no implication. It stems, instead, from our need to label and categorise. To attempt to find meaning where there is none. We do it because we want to, and because we can.
Not because we should.
Where’s the love?
Her’s another problem with the idea of a correction. Have you noticed that there’s no word for when the market rises 10%?
And why is it that somehow we’re ‘correcting’ something that was wrong by falling, but not rising?
The implication is that when the market was 10% higher, it was wrong, but now it has fallen 10%, it has ‘corrected’.
But when it was 10% lower and goes up 10%? Well, that’s not a correction. The market was only — in hindsight — wrong when the subsequent move is down.
So what was it before shares went up? And why no label for it?
It doesn’t end there, though. Because you know how the market moves, over time? Yes, up.
Over 3, 5, 10, 20 years? Up.
It does that because the best companies end up being larger than their competitors, they make more money, and so share prices rise. It has ever been thus, over long periods.
So if the natural movement of share markets is up, why surely bouncing back from a low should be the definition of correction. Resuming its upward path should be seen as ‘correct’, right?
Certainly, that’s the lesson of history. And from Warren Buffett himself.
But there’s no word for that. And that awful word, correction, abounds.
But there’s some good news. Actually, two pieces of good news.
First, the long term story of the stock market is that the optimists win. Second, while I’d prefer the pessimists learn to be optimists, their very existence provides us with opportunity.
Because if the market is going to go up over time, but the pessimists are too busy looking at the downside… that leaves the upside to us. While they worry about the last — or next — 10% fall, we’ll worry focus on the positives.
And if they get so pessimistic that they want to sell shares at fire sale prices, then we’re the ones who can pick up a bargain.
Lest I be accused of schadenfreude, though, this whole email is, at least in part, an invitation to the pessimists: join us as optimists, instead! The very significant weight of history is on our side!
Can I promise you that it’ll be smooth sailing? Of course not. But I am very confident that markets will be higher — perhaps significantly so — 5, 10 and 20 years from now.
And lest I be accused of having my head in the sand, I’ve heard the cries of “This time it’s different”. Except that people have always said that. How do I know? Because Sir John Templeton called them out decades ago, with this line:
“The four most dangerous words in investing are ‘This time it’s different’”
This time it’s different because of debt, right? Or quantitative easing? Or fiat currency?
Just as it was with Brexit? Or the GFC? Or the dot.com bubble? Or the ‘87 crash? Or the Oil Crisis? Or Vietnam? Or World War II, or…..
Maybe, eventually, it’ll be different. But betting that it would be different has been a very expensive blunder for decades. If you want to bet against the tide of history, be my guest.
Me? I’ll back the creative, wealth-building power of innovation and growth that comes with democratic capitalism. The very force that’s vastly improved wealth and living standards for decades.
And I’ll ignore those who get a rush of pleasure from hitting arbitrary, short-term market falls.
Actually, thinking about it, while calling a 10% fall a ‘correction’ is dumb, I know why people haven’t come up with a name for a 10% rise.
That’s because it happens so regularly, that there’s already a name for it: investing.
We’re living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.
That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.
We’ve found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!