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An official ASX correction? Incorrect!

Apparently, when the ASX closed on Thursday, the stock market was in an ‘official’ correction.

Which is funny, because I couldn’t find the government agency or ASX department responsible for certifying that description. I mean, there are official descriptions of the licence you need to drive a car, and official rules about mail tampering, but try as I might, I just couldn’t get a single regulator to certify that the 10% fall from August’s stock market high was an ‘official correction’.

I even checked with my US colleagues and Googled the United Nations. Someone, somewhere, surely must be in charge of this very important ‘official’ function.

I jest, of course. At least about the UN.

No, there is no such thing as an official correction. Sure, many ‘market participants’ (a snazzy sounding term that covers talking heads, traders and stock market chat room readers) can’t help themselves but get caught up in arbitrary descriptions. And most would agree, just on the basis of common usage, that a 10% fall is a ‘correction’.

Good, so now we have that sorted out, we can do something, right? I mean, a 10% fall must mean something, mustn’t it?

Nope.

It’s as arbitrary and useless as you’d imagine. Maybe the market climbs higher from here. Maybe it keeps falling. And that’d be the case whether we were in ‘correction’ territory or not. If the market was down 9.9%, rather than 10.1%, no-one would call it a correction. But it wouldn’t alter, one jot, what comes next, whatever that is.

There is no action, response, intervention or anything else, once we cross that magical double figure fall.

So why do we obsess over it? For no good reason. At all.

Best as I can tell, it’s just the human fascination (and that’s putting it mildly) with round numbers. Each time the ASX goes up (or down) through a nice round number — say, 6,000 points — it gets remarked upon as if it matters.

So, apparently, a fall of 10% is considered a ‘correction’ and 20% is a ‘bear market’. Yes, our compulsion to categorise and label everything strikes again and again. Which is wonderful for the historians. And would be really useful if time travel is ever invented and we can go back in time to take advantage of that knowledge (though I think betting on the horses would be a more profitable pursuit if you were in possession of perfect foresight — the wins are more frequent and much larger, in percentage terms).

But there is literally nothing that can be done with the labels we apply to the market. Sometimes, a 10% fall is followed by another 10% fall and another. At other times, the market reverses course to set new record highs.

But worse than meaning nothing, these historical milestones can actually be a negative thing, specifically because our human nature doesn’t only categorise, but also innately — and often subconsciously — likes to extrapolate trends.

That’s why when shares are falling, many people assume that it’s a terrible time to invest because, well, duh, they’re falling. It’s the very same factor that makes reluctant investors finally succumb to FOMO and buy when the market is riding unreasonably high. We know we’re supposed to ‘buy low and sell high’, but our very nature actually leads us to want to do the opposite.

Foolish takeaway

Which leaves us where exactly? The good news is that we’re free to simply disregard the labels — and the noise. If you liked a company’s shares on Monday, and nothing changed other than the price, you should like them a whole lot more now. And if you didn’t like them a week ago, the recent falls shouldn’t be enough to tempt you. And that would be true, whether or not we’re in a correction.

As for the ‘official’ bit? Consider yourself officially corrected!

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