How Low Do We Go?

Lots of emails coming in saying “good call on the correction.” Perhaps, but there’s nothing “good” about it if you are long stocks, that’s for sure. No matter how many times you’ve experienced nasty pullbacks in the market, and no matter how well you understand that we need to see this kind of action every once in a while, it still isn’t fun to sit through.

When will it stop? I don’t know, nobody does. I do think, though, if you had to pin me down, that we will continue to go lower. In fact, I almost prefer to get the whole 10% correction thing out of the way (we are halfway there so far). Let’s just take the pullback that we know is coming at some point, and move on to brighter skies.

Three and a half years is a long time to go without a 10% drop. Sure, we went 7 years in the mid 1990’s without an official correction, but that ended badly. Heading into 2006, Peridot was up 72% over the prior 3 years. That’s a lot. I’m more than willing to concede a pullback, and then we can run again.

As far as how to play this market, I’m not doing anything dramatically different. I did raise cash when I sensed we were setting up for a drop and posted such on this blog, but since I’m a long term investor and not a trader, I’m still very much net long. An above-average cash position for me is between 10 and 20 percent, since despite a near term bearish call, I still like the stocks I own looking out 2 or 3 years, and my investing time horizon is even longer than that.

I have sold my metals stocks (gold and copper) while holding tight on energy because of the upcoming summer driving and hurricane seasons. Economically sensitive areas will get hurt most as GDP growth slows, so try to focus on stocks that have secular trends behind them. Aside from that, relatively cheap (below-market multiples) stocks with solid longer term growth outlooks are the kinds of positions that you should feel okay holding through the correction and for the months and years ahead.