The stock market correction of 2018 & how to deal with it.
Updated: Jan 25, 2019
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.
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:
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!