Wesley's Rant: Interest Rates, Corrections, and Opportunities?

Thursday, February 17, 2022

 

Let me begin with a quote: 

 

A market downturn doesn’t bother us. For us and our long-term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short-term investors and market timers is a correction, not an opportunity.”

- Warren Buffet

 

This quote is one of many statements that has been attributed to legendary investor Warren Buffet over the years. He is currently 91 years old, the CEO of Berkshire Hathaway, and has a net worth of over 115 Billion Dollars. So if corrections in equity prices are an opportunity, why do so many investors think the opposite is true and tend to pull back on their investing or, worse yet, sell during corrections?

First, let’s get a basic understanding of what a market correction means. 

market correction or a technical correction is a drop in a stock or bond price of at least 10% but less than 20%. 

Bear market is a drop in a stock or bond price by more than 20%. 

According to Bloomberg, if you look at the S & P 500 Index from 1942 until the end of 2021, a drop of 10% in that index happens on average once every 16 months. [1]. 

The last time we declined 10% or more in the S & P 500 was March 2020. That was 22 months ago. Since the low point on March 4th, 2020, the S & P 500 had increased in value by 27%, closing at a high on January 3rd, 2022. [2]. Since that January 3rd high, the S &P 500 Index has dropped 6.7% as of February 4th, 2022. [3]

So, is this the start of a normal market correction that historians say is long overdue, or is it the start of something much worse? Is our economy heading for a recession? 

The financial news channels have certainly been on overdrive promoting the headlines of the day. Inflation, rising interest rates, rising wages, a labor shortage, Russia possibly invading Ukraine, China, Taiwan, Omicron, and many more headlines have not been mentioned. But, we are all humans, and the 24-hour noise of constant news can undoubtedly drive your emotions. 

If you happen to invest on your own in individual stocks when Apple was down 13% in price to start the year, did you buy more of it? Do you know that if you invest in stock mutual funds, the managers who run those investments always have cash in their respective portfolios? 

Did you know that if they have a firm conviction in a particular stock, they may buy more of it during a price drop?

Only history will tell if the current volatility we are experiencing in the equity and bond markets is a normal and healthy correction or the start of something worse. So perhaps we need to go back to that quote from Warren Buffett and answer a fundamental question. Are you a long-term investor or a short-term market timing investor? 

I have met both types of investors over the last 30 years, and the ones that have created long-term, lasting wealth are the long-term investors. If the previous few weeks have you anxious as an investor and work with a professional advisor, I suggest you meet with your advisor and review your investing goals. 

If you are an investor doing it on your own, do you view this current volatility as an opportunity? During these periods, the decisions you make as an investor can have a long-term, lasting impact on your financial success.

Wesley Lentz, 

signature wesley

Managing Partner, Financial Advisor, CFP®, J.D.

Footnotes and Disclosures

[1] The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance

[2] Yahoo Finance, 02/04/22

[3] Yahoo Finance, 02/04/22

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