As everyone is getting ready for Christmas, the stock market has decided to give us one of the worst starts to December since the great depression. I know many people are asking, “why” this is happening. The short answer is that the markets are concerned the economy is slowing down. There is a lot of other noise around that idea, but that is the central theme.
Our number one goal is to help our families experience more peace during these times of uncertainty. I don’t know when the extra volatility will end, but I have high confidence it will end. With that in mind, I thought I would share with you three blessings of a stock market decline. It may be hard to believe, but there are good things that come out of this drop.
First, companies are more affordable and currently appear on sale. This may not seem as obvious or beneficial, but this is a big deal. There has been a lot of hand wringing from the national pundits that the overall market was too expensive. I disagree and believe the market has been fairly valued based on the research we collect. Company earnings have increased substantially this year and yet stocks have not increased at the same pace. Long term, a fairly valued market that is selling at a discount, should see prices returning to normal levels in relatively short order. This doesn’t appear to be like previous declines where expensive stocks got cheaper. This looks more like a Christmas sale that will provide buying opportunities for those who have cash and decent long-term returns for those that are patient.
The second benefit that I am observing from this decline is that the dividends continue to pay out of the portfolios we hold. That’s one thing I love about dividends. When you buy good dividend paying companies, they tend to continue making payments, even when market conditions deteriorate. Many of our investors rely on these dividends to provide income. Despite the temporary moves of the market, the dividends continue to pay. We also pay attention to the dividend payout of each of our companies. The biggest threat to a company paying dividends is if they use too much of their earnings to make these payments. The health of the dividend companies we own is currently strong, and we will continue to monitor them on a regular basis. Whether you take the dividends as income or reinvest them into the portfolio, dividends provide a silver lining that shouldn’t be ignored.
The third benefit I want to bring to your attention is a gentle reminder. You don’t lose anything in a declining market until you decide to sell. If handled correctly, market declines become temporary blips in a long-term investment plan. For those of you who rely on income from the portfolio, we always hold 3-5 years of cash need in liquid investments inside the portfolio. This is not where we want to sell equities. So, like the Boy Scouts, we are prepared.
Many people don’t know this, but market moves look more exaggerated during the holidays. This is because less people are trading. With less people, trading, whatever direction the market takes, tends to be extended, because there are not many people on the other side of the trade to offset it. As we head into the end of the year, don’t be surprised by big market moves in either direction.
I leave you with these lines from the classic 19th century Rudyard Kipling poem “If—”. Warren Buffet wrote them in his 2017 Berkshire Hathaway shareholder letter. I believe they carry an extra beneficial wisdom for us today.
If you can keep your head when all about you are losing theirs …
If you can wait and not be tired by waiting …
If you can think – and not make thoughts your aim …
If you can trust yourself when all men doubt you …
Yours is the Earth and everything that’s in it.