WWII 111: Reacting to the Market Correction, When Corporate Filings are Due, and Advice to Newbies
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About this podcast
This show is about the block and tack of investing. On this show, I have laid out a framework for you to follow as an end to end investment process.
- We start by learning how to value businesses as if we are about to walk into the board room with an offer in hand for the entire business
- We focus on getting really good at generating ideas until we have more ideas than time. If you are casting around and not getting a nibble, try a different fishing hole.
- We are willing to go anywhere to find ideas, from arbitrages to shorts to micro-caps to long holdings. We go where the competition can't or won't.
- We put ideas through an idea management system, pushing them along our analytical framework until we reach a decision on what to do with that idea.
- We keep watchlists which compare current prices to our estimates of intrinsic value.
- We minimize our exposure to moving prices by only checking our watchlist, and stock prices once a week at most.
- We utilize a portfolio management framework that includes checklists, position sizing, buying programs that spread out buying out over a year, and buy and sell disciplines.
- We sit with 30% in cash at all times until the market corrects 10%, then we put a third into our buying program, down 20% we put another 1/3 in, and the last third goes in when the market is down 30% from its most recent peak. We start to raise cash again as the market passes it’s peak and market cap is more than 140% of GDP.
These are the eight legs in the investment stool that we rely on to become better and better investors.
Main Topic: How to React to the Market Correction
After a two day drop on Thursday and Friday of last week, we experience a 4% drop in the market on Monday. This episode is about how to react to the market correction, what happened to cause it, and where we are now year to date.
Using the S&P 500 index as a proxy for the overall market, lets analyze how far down the market has dropped since its most recent peak.
The S&P 500 started the year at 2,673 and peaked on January 26 at 2,872. The year-to-date return at that point was about 7.4%. So that upward move in the overall S&P was all in one month, January. The S&P 500 closed Monday at 2,640, down 8% from its peak, and now negative 1% for the year to date.
As of Wednesday, the S&P 500 was back up to 2,715 and up 1.5% for the year.
So we are approaching the 10% correction level that will trigger adding 1/3 of our cash into our buying programs to be spend over the next two months or so. The S&P would have to reach a level of about 2,584 to be considered a 10% correction. We are close, but not quite there. As I write this, the S&P 500 is at 2,631, so another 47 to go.
There has been a lot of speculation about the unusual move on Monday. A four percent drop is still a rare occurrence, and it seemed to accelerate into the close on Monday. Some pundits are suggesting a flash crash type of algorithmic trading problem impacted the market. The price drop was so fast that by the time you put a buy order in, it would not be filled. This was not a normal panic type of reaction, but some kind of forced selling.
It could easily have been a large institutional trader that put a wrong order in, or something triggered a trading program that is used by large scale institutionals. We may find out eventually, or we may never know.
The first reaction you should have is one of joy. Lower prices means the opportunity to pick up valuable merchandise even cheaper. Open up your watchlists and go through them in detail. Update intrinsic value for any companies on the list that are out-dated. Check your margin of safety. Sometimes even a ten percent correction may be good enough to create a buying opportunity in a specific issue.
Check your special situations, which should be on their own watchlist. At a lower price, do any of your arbitrages look attractive? While not offering the massive returns you can get from a long holding, arbitrages are a better use of cash than sitting in the bank.
Find out what sectors have fallen the hardest and start looking for babies that have been thrown out with the bathwater. You are looking for a sound company selling at a cheap price in a battered industry.
In essence, instead of sucking your thumb, as the market falls go to work! I'm at my busiest when the market is in a correction because I don't want to miss out on a sale. So I focus intently on the treasure hunt. I may change my weekly schedule around or postpone unrelated commitments to free up additional time for the hunt.
You know the saying "make hay while the sun shines", well, the sun is shining on value investors when prices are falling.
Ask JB: When do companies have to file their reports?
submitted by DaltonDime
JB Says: According to the SEC.gov website:
|Form 10-K||Due 90 days following the end of the fiscal year.|
|Form 10-Q||Due 45 days following the end of each fiscal quarter.|
JB Says: You'll have to listen to the episode to hear my reply to this excellent question 🙂