Correction

I like the term “correction.” It implies that when markets sell off, they’re doing something right. I like this correction, because I think the markets were overpriced at 22x forward earnings. I like it when markets go down. How else will we be able to buy good investments at good prices?

A tough market was a factor in Visa becoming a publicly traded company. Big banks owned this investment prior to 2008. For 50 years! Visa was founded in 1958 by Bank of America, and other banks came to participate in the technology and own some of the shares. But banks needed money during the financial crisis, and they had to sell assets that had value to cover for loan losses.

That’s how some of our clients came to own shares in Visa. The banks couldn’t afford to hold onto all of it for themselves, no matter how much free cash flow that business could generate in the future. Visa has returned something like 1700% since its IPO in March of 2008. (source: Koyfin). Adjusted for a 4:1 split, Visa IPO’d at $11 in today’s pricing. It’s now at $256.

That’s how some of our clients came to own shares in Visa.

We never would have gotten the opportunity to buy that investment if the banks didn’t need to sell it.

I’m not telling you to buy Visa. I’m telling you that when conditions get tighter, new investment opportunities appear. We’d like to help you think through this selloff process so you can put what’s happening in context. Market events like the one we’re in often go through a few stages.

Stage 1

Stage 1...

In this first stage of a selloff, we’re looking at investment accounts, saying: hey! Our diversification strategies worked pretty well. This account is only down x%, a good bit less than the market. If you need to look at your investment allocation, now is a good time! We’re not very far off our highs in most portfolios. You can rebalance here if you’ve taken on too much risk. Or you can buy a part of what you’d like to own if you’re trying to get cash invested.

Beware- the old high prices on stocks are not a good guide to what you should pay.

Stage 2

Stage 2...

Sometimes markets get into stage 2 or 3 of a selloff. In stage 2, you’re in no man’s land. Your account is down 10 or 12%, with a lot of individual stocks down 25-30%. At this point It’s hard to know whether to be a buyer or seller. If you have a balanced portfolio, it’s not too hard to use some cash or short term fixed income to buy stocks. But If you’re close to 100% invested in stocks, you may be questioning that decision. You might still be thinking about raising cash. If you had cash, you can often buy here and have a profit within 12 months. But if you need the money, prices can go lower. So, you have to make investments you can afford to hold for a while.

Stage 3

In the 3 rd stage- markets sometimes get there- investors know stocks are cheap. You might say: these prices don’t make any sense! But your recent experience with stocks is bad. If you had a high allocation to equities- say 90% – there isn’t much for you to do except to hang on. You’re along for the ride. If you have a balanced portfolio, maybe you have a little more cash or bonds to commit to buying stocks, and you get them at very good prices, raising the chance you could get very good future returns. But in the worst markets, most investors don’t have any cash at this point, or not cash they can afford to risk. They’re paying down debt instead of taking on leverage. And that’s why the prices bottom.

In the 3 rd stage- markets sometimes get there- investors know stocks are cheap.

We’re in stage one of this thing, and my guess is that we get to stage two- more selling to come.

I bet we don’t get to stage 3 for a few reasons: the economy is not in recession, the banks are hedging against the last big problem, and the private sector is not over-levered. The governance is good.

The system has integrated a lot of information in the past 15 years. As much as people are skeptical of the government, of the Fed, I don’t think that’s the big story. The big story is that we have framed and protected ownership rights and developed capital controls so that the United States is THE most trustworthy place to put your money in the entire world.

The system has integrated a lot of information in the past 15 years.

The story is that highly developed governance incentives long term investment. The United States picked up more than 30% of cross-border investment since covid . (Bloomberg, gift article) China’s share dropped from 7% to 3%. Because nobody trusts them.

Some of the people who speak the language of deregulation are simply opportunistic charlatans. They want the public protections reduced. But chaotic and ungoverned environments create opportunities for the least ethical and most aggressive players. Chaos doesn’t distribute opportunity evenly or widely. It makes big opportunities for relatively few players. Beware the people that tell you the only way to fix the system is to destroy it. If someone wants to overturn the apple cart, they’re trying to grab your apples.

You don’t have to drop all your apples in a market selloff. If you don’t have a lot of debt, you can hold your investments and wait. Maybe you can buy more.

You don’t have to drop all your apples in a market selloff.

I’d like to remind you that there is a lot of mass and strength to our financial system. There are ways in which the system seeks equilibrium or responds to change.

For instance, mortgage rates are down to about 6.5%. If mortgages get into the 5%’s, I think we may begin to balance this housing market. Perhaps more owners (with cheap mortgages) would consider listing their homes.

Ironically, lower interest rates on home mortgages might be anti-inflationary. More homes for sale could take the teeth out of this sellers’ market. Buyers might see both lower prices and lower interest rates, and that could generate economic activity by buying and selling homes and investing in fixing them up. Or by releasing credit against home equity at lower rates.

Ironically, lower interest rates on home mortgages might be anti-inflationary.

In other words, today’s problems catalyze the conditions for tomorrow’s opportunities. It’s not all precarious, not the political system or the financial system. The system is not going to fall apart. Far from it. We have the most advanced economy in the world and all the resources we need to course correct. This is a course correction. I like it.

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

With any investment or strategy, the outcome depends upon many factors, including investment objectives, income, net worth, tax bracket and risk tolerance. The investment return and principal value of an investment will fluctuate and may be worth more or less than their original cost.

With any investment or strategy, the outcome depends upon many factors, including investment objectives, income, net worth, tax bracket and risk tolerance.

Jeremy Strickler, CFP®

Portfolio Manager