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January, 2016


Every now and then a variety of circumstances come together in such a way as to spook stock investors, and we get a rapid lowering of equity prices. Such market value retreats can be based on realistic assessments of risk, yet at least as often are due to anxieties about illusory prospects for doom and gloom. In the former category I would put the sharp stock declines during the fall of 2008, when it was for several months uncertain if policymakers and corporate executives could adequately forestall a debacle of Great Depression proportions.

More commonly the downturns tend to be ones, such as we see at present, when losses in market value accelerate secondary to overblown or inaccurate assessments of negative news. The sky is not truly falling, yet in the first half of January this year stocks have gone down more than ever before for the early part of this month.

When the stock market plummets, I am as human as the next investor and not infrequently feel a bit of panic setting in. This is the time to give myself logical pep talks. I try to look at things with a more rational detachment and to remember intelligent dos and don'ts about a falling stock market.

First, do view the situation correctly. Here we can note a confluence of temporary, if worrying conditions, each of which should resolve in the near- to medium-term without permanent harm to the global economy: a slowing of Chinese growth; a glut of oil and natural gas resources; severe Middle East unrest; and high levels of fear about acts of terrorism in this country.

The slower increase in all Chinese transactions, goods, and services means just that, a reduction in growth. There is no evident danger of a recession in China, and that nation's rate of growth is still higher than our own.

Laws of supply and demand are still "on the books." So, while financial disruptions will occur until the current plethora of available petrochemical resources has been accommodated, and there will be dislocations affecting oil and gas producers and their employees, the banks that did the most business with them, and nations too dependent on just one or two commodities, we ought not exaggerate the importance of a single sector on either global or domestic wealth. Meanwhile, our own financial system is getting a net boost as consumers, two-thirds of our economy, are able to purchase gasoline at barely half what it cost in recent years, freeing funds for stimulative spending in other areas.

Great disruptions are currently occurring in Middle Eastern and African regions. Horrible as these are and as difficult as the resultant refugee crises may be as well, their combined devastations are not in themselves as destructive as the chaos of World War II, when, despite that overwhelming global conflagration, the Standard and Poors 500 rose 24%.

We also have understandable concerns about terrorist violence. However, much as an alarmist media makes hey (and sells advertising) by ginning up our fears, such mayhem is a small fraction of the violence ongoing in our country. Oddly enough, homicides, non-negligent manslaughters, and other violent crime are going down in the U.S., showing a 51.41% reduction between 1991 and 2014 (when such stats were last reported). However, if we look at terrorist deaths as a percentage of total violent deaths in the United States, we find they are only 0.99% of the latter figure (421,459). The terrorist death figure (4162 killings) includes domestic as well as foreign inspired violence of all kinds affecting our country, and is probably inflated a bit in a way that prevents apt comparison on an apples to apples basis. It encompasses things, for instance, like mass suicides and deaths of perpetrators as well as innocent civilians and those U.S. citizens killed in plane crashes overseas. It also includes deaths through 2015, such as in San Bernadino, whereas the general murder stats only go through 2014. If anything, then, the percentage of terrorist killings is probably lower. In any case, it is safe to say it is below 1% of the total. On an individual basis as well as in shocking instances such as on 9/11, any terrorism is both dramatic and inexcusable. Nonetheless, it is important when viewing the objective bases of a correction or bear market to put things in perspective. If less than 1% of all murders of our nation's men and women are due to terrorist violence, it is not a factor that warrants a big reduction in equities' price. As a fraction of deaths of all kinds, terrorism (domestic plus foreign) is a still more negligible variable, on average accounting since 1991 for less than 0.007% of all death causes per year in this country. Markets, realistic in the long-term, will eventually take this into account so that prices will rise again.

Of course, if a terrorist group were to explode a hydrogen bomb in Washington, D.C., New York City, or Los Angeles, a huge swoon by the markets would be justified. Till such an eventuality, though, the markets will in time adapt to a more accurate assessment of terrorist risk based on historical precedent.

Finally, the Federal Reserve has recently raised interest rates (by just 1/4 of 1%), doing so for the first time in several years. This is actually indicative of an improved financial system, in far better shape than when the Fed lowered rates to near zero. And the move as well as others like it will help banks begin to make more money from loans to consumers, both factors helping our economy further.

My own opinion, then, is that we are going through a normal market adjustment, not the end of the financial world as we know it.

Debt to
Apple, Inc.AAPL$96.5854.02%2.14%
Berkshire Hathaway, Inc. (Class B shares)BRK/B$127.2433.79%N.A.
Franklin ResourcesBEN$33.0117.17%2.16%
Qualcom, Inc.QCOM$45.7934.92%4.21%
Union Pacific Corp.UNP$74.1664.66%2.92%

Second, don't sell off all one's carefully selected assets while prices are way down. There is a natural tendency to want to protect what is left when daily seeing the net portfolio falling farther and farther. Yet this kind of emotionally driven redemption of assets is the opposite of the most basic of investment guidance, to buy low and sell high and almost inevitably results in big losses or at least in small gains. Down markets turn into ones that are up. If we restrict our selling mostly to the latter we shall likely be much better off.

Third, do stick with a reasonable, winning investment approach, maintaining, for instance, a well allocated set of holdings in different investment categories, then rebalancing between them annually or when one or more are off by 10% or more from the preferred levels. For example, if one's intention were to keep 40% of the nest egg in stocks, 20% in real estate investment trusts (REITs), 20% in short-term bond assets, 10% in precious metals mutual funds, and 10% in intermediate-term bond funds, but market changes meant these categories were now more like 32% of the whole portfolio, say, in stocks, 15% in REITs, 25% in short-term bond assets, 8% in precious metals, and 20% in intermediate-term bond funds, it would be time to sell shares from the short-term bond and intermediate-term bond assets and buy more of stocks, REITs, and precious metals, to raise those types of investments to their planned proportions of the portfolio again, in this way selling bond asset shares when high and buying shares of the other three kinds of investments when they were down in price. Given the normal ups and downs of the markets, over time this sort of rational approach to portfolio management pays big dividends in both profits and peace of mind.

Fourth, don't use up all one's reserves, short-term bond holdings, or Certificates of Deposit, instead keeping some powder dry. Though the markets may have taken certain varieties of shares down considerably in price to date, they could almost always go lower yet. An extra cushion of cash equivalents can come in very handy once more fear-driven investors throw in the towel and sell most everything. One never knows just when such a capitulation will occur. When it does, it is wise to be ready. If a little low in reserves, one can sell off a few of the worst assets, those with the least risk-adjusted prospects for delivering solid gains in future.

Finally, do take advantage of market dips to buy shares of safe, strong companies, the type one would want to hold in a portfolio for the long-term, when their prices are relatively low. What sorts of companies? I encourage each person to do his or her own due diligence and/or consult with a trusted financial professional, but at the above table are in my view five excellent companies to consider purchasing at this time. Since the global equity markets continue to be quite volatile and prices may go substantially lower yet before the current turbulence is over, my own plan would be to simply buy a few shares of each now, getting my toes in the water, but hoping to maybe pick up more at even better prices later on.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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