The markets' swift downdraft is historic in how quickly it occurred. I would attribute a large portion of it to the exponential growth in the application of computers in trading and money management. While it is clear there are going to be earnings downdrafts in the next few quarters, computers are the enablers that result in quick changes and high volatility.
It is as if someone yelled “Fire!” and instead of running for the doors, computers “beamed” (think of Star Trek) many out. Still a mad rush for the doors, only electronically enabled.
The downside of this is that pain is real and swift. Those who were relying heavily on projected future earnings and valuing investments using forward earnings price earnings ratios are seeing quick price/earning's contractions and resulting investment value reductions.
The upside is that computers exacerbate behavioral biases inherent in how they were programmed. This creates opportunities that might be "once in a lifetime" to own high quality companies, with great dividends and conservative balance sheets. In the short-term, earnings will be significantly affected and some dividends may get reduced or cut.
Having a diversified portfolio of high quality companies is the place to be in these tumultuous times. Always remember that a diversified portfolio of dividend companies will pay while waiting for the next upturn in price and P/E expansion.
It looks as if value investing will be taking the lead from growth investing once again.
Be smart, be well-read and be successful.
