One of the most successful investors of all-time, Warren Buffet, once said, "It is wise to be fearful when others are greedy and greedy when others are fearful."
I distinctly remember when this quote showed up in Buffet's editorial in the New York Times on October 16, 2008 in the depths of the "Great Recession", and it has stuck with me ever since! In that article, and at that very scary time, he goes on to say, "I've been buying American stocks." In hindsight, his contrarian moves appear almost prophetic as he put fear aside and focused on the fundamentals.
With what has transpired over the last week, there is once again fear in the market. However, coming into the second half of 2019, we began counseling clients that the market appeared overbought and valuations were high. We started preparing for a correction in the market, which has now occurred. Not knowing precisely when it would start or what would cause it, simply by looking only at the fundamentals, we began selling stocks when others were greedy near all-time highs.
Now, stocks are at much healthier valuations. And our portfolios have held up far better this past week. Our overweights to bonds produced gains in the portfolio. And some of our other alternative funds broke even during the huge fall of the stock market. We weathered the storm!
It's hard to know with absolute certainty exactly where the bottom of this correction will be. What I can share with you is that, since November 1974, there have been 22 corrections where the market has pulled back between 10-20%. So, for starters, pullbacks like we just saw last week happen fairly routinely. Furthermore, in those 22 corrections, only 4 have gone on to be a bear market with a pullback of 20% or more! The odds are in our favor.
On top of that, many of the economic fundamentals that we routinely follow have very recently improved including a surprising surge in Leading Economic Indicators in January and increases to Manufacturing and Services PMI's. On top of that, the Fed just cut interest rates by .50%, which is a measure to restore confidence and stop the bleeding. Taking all of this into consideration, this does not appear to be the start of the recession bear market just yet, but rather a time to buy when others are fearful.
As an investor, I've seen fear creep into the market in the past when SARS, H1N1, Ebola, etc came onto the scene. It is our opinion that the likelihood remains that this market will rebound as fear begins to dissipate just as it did in all these prior incidents. Perhaps setting the stage for a final rally of this historic bull market.
In our most recent economic commentary put together just over a month ago, we commented that "stock valuations have expanded significantly... (and) are now nearing their most expensive point since the last recession." We went on to recommend a "cautious approach" at that time but to keep a "keen eye towards economic fundamentals and opportunities to rebalance portfolios."
And ultimately, that's what we feel this correction has produced... the opportunity to rebalance and buy back what we've already sold last year in advance of this correction near all-time highs.
A version of this letter was sent to all clients of Teeple Wealth Management this week (albeit with a much less bloggy subject line!) along with a set of recommendations that were custom to them. In two days, we were able to proactively work with 100% of our clients by reaching out to them with timely ideas that generated ZERO in commissions... the benefit of a fee only advisor. Our client cap per advisor is the only reason we were able to reach everyone so quickly given that we're not spread thin. Have you heard from your advisor lately?