When the market gets pummeled, like today, active managers who follow an index do their best to avoid doing worse than the index. This means they dump shares that aren’t going to do well over the short run (using the market level as a reference) because it can hurt their performance numbers.
On the other side, this is the beauty of short-term orientation by professional managers. Companies with great long-term prospects start getting dumped – not because the companies are fundamentally weak, but because the “flow” of the market is moving against the active manager’s short-term interests.
For individual investors who are patient and aware of company fundamentals, it can represent ownership opportunities, but you have to have a long-term outlook based upon the company’s economic, market, and financial fundamentals.
As the herd effect permeates the professional active investor community, opportunities get exposed. We have yet to see a tectonic plate shift, but the rumblings are out there.
Keep your eyes open since we are in the early innings of a “beat down”. At this point, a margin of safety is important to have.
You can never protect yourself from a full-blown earthquake, but it is good to have a portfolio architecture that has a greater ability to withstand higher shifts in the market’s “plate tectonics”!
