Different Makes a Difference^®

Don't Get Spat Out In Market Corrections

If Apple announced a limited time 10% discount on the iPhone 6, consumers would line up around the block for the opportunity to get a deal. When stocks go on sale, investors have the opposite reaction—most are reluctant to buy and some sell. It isn't buy low, sell high thinking!

The reason people treat an iPhone and a stock differently comes down to perception. The perceived quality of the iPhone does not change with small changes in price, whereas fluctuations in stock prices influence attitudes about the economic outlook and underlying business fundamentals. Investors are prone to reason that rising stock prices signify a brighter future. Conversely, they fear that falling stock prices foretell impending doom.

Combine constantly evolving economic and business fundamentals with the psychological influence of price on perception and the human tendency to extrapolate recent trends, and you get stock market volatility. Appreciating the dynamics at play helps explain why the average investor does a poor job of navigating the road to riches in the stock market. Sadly, many investors get sucked in when stocks rise and spat out when stocks fall. Don't be one of those people.

The intrinsic value of a business is a function of all future cash flows, not just those that occur next quarter or next year. Successful investors know this and take advantage of market volatility by buying during inevitable corrections.

The recent decline in the stock market may forecast an economic soft patch and disappointing corporate results. However, it's doubtful that the long-term outlook for good businesses has meaningfully changed. Moreover, economies and markets are cyclical and self-correcting. Whether or not the recent significant drop in commodity prices and interest rates points to economic weakness around the corner, there is no doubt that lower commodity prices and cheaper borrowing rates will ultimately stimulate the global economy. The fragile European economies will get an added boost from the weaker Euro currency, as it will help stimulate exports.

We have always expected the post-crisis economic recovery to be a long, muddle-through affair punctuated by fits and starts. That’s what has transpired. Investors are currently anxious about the latest fit, but we are confident it won't be long before they embrace another start.

In the interim, investors should stick to their long-term plan. If there is scope to add to stocks within your defined long-term asset mix, then now is a good time to buy.

Patient investors will be able to afford full-priced iPhones.