• Jan De Ost

The stock market correction of 2018 & how to deal with it.

Updated: Jan 25, 2019

#stockmarket #correction #2018

Here below are a few examples of how the global financial markets behaved anno 2018:

This could give a depressing impression...

Yet, let's put them into perspective and zoom out to "a few years"-period.

S&P 500 1997-2019

Dow Jones 2014-2019

FTSE 100 1985-2019

BEL-20 2009-2019

So, was it really that large a correction? Not at all! In fact, it was a very modest correction. These types of corrections occur almost on a yearly basis and certainly every 4 years, on average.

Now, let's look at things from a 'business man' perspective.

Imagine, during your frequent networking events, at times you are offered a gin tonic. You like the drink and especially the mix with it's sweet, yet mildly bitter tonic. There is of course a company behind this good tonic and it turns out to be Fever-Tree.

With your business skills, you immediately sense that this might be a quite profitable company. Without delay, you start an inquiry and find the following revenue data:

Fever-Tree Company Revenues - Wall Street Journal

These seem to be very satisfactory results, but being the business man you are, you promptly verify if these revenues actually generate tangible profits. You read on to find:

Profitable indeed! But, imagine being the actual owner of this business, would we be assured to receive a decent return on all of our precious capital that was invested some while back? Let's look at the Return-on-Equity in the last few years:

Dividing the net income by the respective annual ending's Shareholder's Equity, you come up with: 2,4%, 20%, 31% and 35%.

"Where on earth would I be able to get these kinds of returns on my investment, somewhere else?", you ask.

You can smell a potential investment from afar, and scramble towards your online stock charts, to find:

Alas! The stock has already soared up to 4 times it's 2016 price... You cannot help but think: "I'm too late!".

That was as of September 2018.

Three months later, you are reading in the papers: "Stock Markets Tumble!" "Trade War in Full Blast" "Hardest fall in stock markets in recent years".

Purely by coincidence, you take another glance at the Fever-Tree stock price. You see:

"Good gravy! The stock is cut in half!", you shout.

Now, our question: do the prices at which that same company is quoted -within a 6- month timeframe- seem to be rational?

This proves the fact that the stock market frequently offers prices of solid companies, that far exceed it's prospects or greatly under-appreciates it's future, as was already demonstrated by the great Benjamin Graham, 50 years ago.

Surely, thus, many opportunities abound!

Happy hunting...

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