Market prices are only relevant if you have to sell

Andy Kessler wrote an excellent opinion piece that appeared in the Wall Street Journal yesterday. His article was titled “Ignore the Stock Market Until February.”

His basic point is that a lot of selling in the stock market over the last 2 months has been due to reasons other than a rational assessment of investment merit.

He goes on to list the reasons why many people have been selling:
– tax loss selling – selling to book losses, thus reducing taxes
– mutual fund redemptions – people selling mutual funds cause the effected money manager to have to sell something, and such managers tend to chose things that have gone down the least
– mutual fund cap-gain distributions – investors are selling to pay their capital gains taxes
– hedge fund redemptions – just like mutual fund managers, hedge funds facing redemptions have to sell something, and they are choosing to sell things that have gone down the least
– margin calls – people, both individual and institutional investors, who bought stocks on margin are selling to cover margin calls as stocks go down–the so-called process of de-leveraging

I’ll add another thing to that list–stop loss orders. People who think that putting in stop loss orders will save them from losses are having their stop loss orders triggered over and over again as the market goes down. This tends to be sell-reinforcing on the way down.

The result is a bunch of forced selling that is causing the stock market to go down more than it otherwise would. This may seem bad, but it’s actually a good thing. (If there were a self-reinforcing cycle that made flat screen TVs go down in price, we’d be tickled pink because the value of the TV to us doesn’t go down as the price does–how are stocks different?)

Why are declining stock prices good? Because that means the stocks being sold are getting pushed down to lows they would not otherwise hit. The underlying value of the business isn’t changing, just the quoted price other people want to buy/sell it. If you hold a company whose price has gone down, you are free to disagree with the market by not selling, or even buying.

As long as you don’t have to sell, the current market quote isn’t relevant.

Only when you have to sell are market prices relevant. If you don’t have to sell, you don’t have to book losses. And, if you don’t have to book losses, then you haven’t really lost anything, yet.

Benjamin Graham once said the market should serve you, not be your master. Right now, the market is serving up unbelievable discounts on some of the best companies around. This is a great time to buy, or a great chance to sell things that haven’t gone down and buy great companies that have gone down significantly.

Kessler makes the point that the market will continue to go down in December as tax loss harvesting continues and leverage is unwound. In January, a bunch of money managers will get fired for lousy performance, and the new managers will be selling in January to get rid of the previous manager’s mistakes. That means market prices are likely to be far off underlying values until at least February.

That means you have 2 months–2 glorious, happy months–to buy into the best bargains seen in almost 25 years. I’ve never been so excited about future returns.

When February comes, I’ll be well positioned to benefit, and so will my clients.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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