Last week was one big downhill run. It was the fastest drop since 2008.
I wouldn't doubt that with all the automated and computerized systems that the cycle times are speeding up. Computers are basically dumb, but are able to do what they are programmed to do really, really fast. Since Computers are programmed by humans, my belief is that computers only exacerbate human behavioral biases. Thus, when the S_it hits the fan. The fans worked over time.
I often speak about having a margin of safety. There are lots of ways to build a margin of safety. Buying at low prices provides some of it. Owning established, conservatively managed large capital stocks at reasonable prices helps. Also, having companies that are not excessively leveraged with debt can help. Dividend paying companies can also provide a buffer. When the market drops, like it did last week, you thank your lucky stars that you had a margin of safety.
While most stocks drop in a downdraft, well-established, conservatively managed, large caps usually don’t have as big a drop as new companies, without earnings and dividends.
If a stock was selling at a high price, was over leveraged and had no earnings, the downdraft to someone who bought right before the downdraft would be painful, but if it was purchased years ago at a low price, the drop probably didn't effect returns that much.
Having a margin of safety is critical at the top of a market cycle. One of the keys of long term investing is being able to survive the cross winds which often come up quick in the market. Two weeks ago, we were hitting all-time highs. Then, a storm blew in. Like backpacking, you always want to have your eye on the weather or you could find yourself in a very bad position.
Making sure a portfolio is adequately positioned to survive a potential storm is a good position to be in after a long bull market run. When the tide goes out, all boats drop down, but the more seaworthy vessels are in a better position to deal with the drop down. Storms are not always short in duration.
Batten the hatches, mate and grab some grog!
Be smart, be well-read and be successful.
