We’re in the early stage of earnings season and there are a number of companies reporting this week. While the 10 year treasury yield pulled back some, last week was a rough week in the equities markets. The NASDAQ is down 15% from its highs, the S&P is down almost 9% and the DOW is down 7.3%.
Downdrafts in the equity markets often go down 20% regularly and they can go down more than 50% after periods of excessive jubilation. It’s interesting how it often works. People are jubilant one day and the next day they think everything has gone to hell in a handbasket.
A significant part of successful investment management is mental preparation. Like a good boy scout, it is good to “be prepared”. So when the unexpected happens, there is so surprise.
In a down market, good quality, long-standing, and fundamentally strong stocks can drop more than 50%. History has shown this time and time again. Companies with no earnings and just expectations of future earnings can be beat into a pulp. Worse of all, an economic turn can expose weak companies to bankruptcy.
When the market is frothy like it has been for a long while now, it is a good time to shore up the quality of equities owned. Strong, fundamentally sound companies will drop significantly in price with a downdraft, but they are much more likely to “survive to play another day”.
Equities are the place to be for the best long-term rewards, but that doesn’t mean it will be an easy ride. Trading in and out, owning weaker companies, and buying at high prices are just a few of the sins that can decimate a portfolio. Preparing mentally for rainy days and not crossing fast moving streams can make the difference between dying, surviving or thriving. As my college wrestling coach always said, develop some intestinal fortitude.
Be smart, be well-read, be prepared and be successful.
