If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks. --John Bogle
On Sunday, the Philadelphia Eagles beat the New England Patriots 41-33 in an exciting, back and forth Super Bowl . Many people enjoy sports for these kinds of roller coaster games where the outcome only gets decided at the very end in a dramatic manner. Long time athletic event viewers, enthusiasts, and participants often remark you might be better off if you only watch the last two minutes of a game because that is really all that matters (if you look at ESPN’s subscriber numbers decline, it appears that’s what may be taking place). So, yes, the Super Bowl was heart stopping, fair enough, but in comparison to the daily action in the equity market, it cannot hold a candle. Consider what happened on Friday, where equities fell at the open, retreated by over 500 points, and subsequently recovered with a sharp gain of over 300 points. The day before, stocks fell over a thousand points. On Monday, equities fell over 1,200 points, the largest daily decline ever. All in all, from the top, markets have lost a little over 10%. Now that we are all a touch less wealthy, although certainly never stronger in spirit, it is probably a good idea to look at what the causes might be and develop some ideas for how to proceed accordingly.
In looking at the specifics of the selloff, many are attributing the wave of selling to the massive increase in volatility, which started a week ago on Friday. The volatility instruments are a way for investors, mostly traders, to bet on or against fluctuations. For the last few years, there has been very little volatility, and increasingly sharp eyed profit seekers decided it was better to short, or bet against,volatility. By doing so, they used leverage instruments, and when volatility spiked, they had to sell what they could to cover their inaccurate bets. Sell they did. Over and over again, we have seen that leveraged entities cause these stock market selloffs, or certainly, the more things change…. There is also the train of thought that the christening of a new Fed chief, that being Jay Powell, always leads the hardened veterans on Wall Street to indoctrinate a new leader by testing their mettle. Probably a more substantive argument is that as interest rates move higher, it is only natural for financial assets to reprice as it is consistent with the fundamentals of finance. All this being said, who cares what the reasons are, the more pertinent issue is, what now?
In that light, it is crucial to remember your time horizon and objectives for investing. In most cases, it is for a longer time period and to grow the value of your assets. Three, five, ten and twenty years from now, few will remember or care about these selloffs (other than market historians) and why they took place. If you are nervous, go over your holdings and the reasons for owning each position. If the operating results are good, and there is a track record of growth over a substantial period of time, the best course of action is to do nothing. The most famous quote by Buffett about this subject is ‘Our investing strategy is lethargy bordering on sloth.’ I am not advocating either lethargy or sloth, but sticking with well chosen companies with proven track records of success. If you are aggressive and adventuresome, you might compile your list of companies you would love to own and if the price is right, certainly take a good hard look. For example, I would love to be able to buy Costco, but it is never cheap enough, even now. There are plenty of others, so take your time to pick out what you want, and the price you would like to buy it at. It makes little sense to me to let people who make foolish bets influence your long term strategy. In fact, if you have the potential of enhancing or making your situation stronger, provided you have the stomach for it, usually there is a reward for the risk incurred. As always, time will tell, and remember, a bell does not go off signaling a market bottom (or top, for that matter).
Elsewhere in the markets, earnings took center stage as two technology contenders (some might say pretenders), Twitter and Snap, showed promise. Twitter declared a GAAP profit, but is still plagued by heavy option expense and no user growth. Snap has plenty of the latter, but still loses truckloads of cash and positive cash flow is nowhere in sight. Some believe the rate of user and revenue growth is quite promising. At the current valuation, it needs a whole lot more of both. In the oil markets, black gold sold off hard on fears of everything, including rising domestic supply and rig counts. I would point out China demand remains at record highs, the Trump Administration is ready to slap sanctions on Venezuela (further stunting already shrinking supply there), and Israel, Syria, and Iran may just be getting started. With inflation fears rising, I still think oil looks pretty solid, but I certainly was wrong last week when I mentioned it. Here in Vegas, Steve Wynn resigned as CEO and Chairman of the Board of Wynn Resorts. He also agreed to let his wife vote her stock. I would note he did not sell his stock, at least not that we know of. Some believe Wynn as a company is not long for the world. A few casino companies have already leaked word about how they might finance such a deal. Again, time will tell, but it is hard to believe Wynn will actually get sold. Again, it speaks to the issue of corporate governance and it’s importance. Wynn’s stock selloff, consistent with the overall market, proves yet again John Ogle's words prove quite wise.