Men Lie, Women Lie, Numbers Don’t

A great businessman once said "Men lie, Women lie, but Numbers don't". When Jay-Z said this, he said it in a song titled "Reminder", and that's what I would like this post to be, a reminder about price fluctuations.

Markets are in a bit of a downward spiral as we hit correction territory.  In the video above, Chief Market Technician at Sterne Agee, Carter Worth, shared some key points explaining why prices can continue to fall.  The video is pretty long, about 11 mins, so I'll summarize what he said below:

1.  When assests drop 5% in price, they tend to fall even lower.

2. Since 1927 there have been 209 "corrections" of 5% or more in market prices

3. The average price decline is 12.2%, while the median price decline is 8.2%

4. Stocks still have room to fall, we are near the 8.2% decline from the high, but can still fall to the average of 12.2%

5.  The average time these corrections have lasted is 38 trading sessions, and the median is 22 trading sessions.  The current selloff has only last for 17 sessions, which means it could fall lower and last longer.

Yesterday, there was a wide trading range, with the S&P up nearly twenty points before selling pressure caused the S&P to end at 3 points in positive territory.  What we are seeing in the overall pricing of assets is a reversion towards intrinsic value. I know my last few posts have been pretty technical for a value investing blog, but I think panic and fear selling, as well as inflated valuations, have an effect on our portfolios.  Mispricing of assets is the way value investors find deals in the first place.

The reason why technical analysis can play a key part in a value investing portfolio, based on fundamentals, is the structure of a deal.  A value investor makes money when he buys an asset, rather than a speculator who makes money when he sells.  We search high and low for value, and make sure that we aren't overpaying to obtain value.  When markets decline we have a real buying opportunity as assets begin to go on sale. Looking at technical analysis, assets can continue to go on sale, even though the companies haven't become less valuable.

There is a saying that "a rising tide lifts all boats".  I'd like to coin the phrase, "in a torrential downpour, everyone gets soaked".  Just as in a bull market, or just a market upswing, prices of bad companies increase, in a market correction, and especially a bear market, prices of good companies decrease.  Let's briefly look at Intel(INTC) a company in my portfolio.

A week ago, INTC was priced at $34.27.  Yesterday, they had an earnings release demonstrating improved revenue and earnings.  INTC is a great company, and increased earnings and revenue is great news, but what has the overall market selloff done to the pricing of this great company?  INTC is down about 10% from a week ago. If we simply looked at prices, INTC would be out of my portfolio, and should be out of yours.  The point is, there was no real economic indication that INTC is now 10% less valuable as a company, no economic data to show that INTC is a bad company to own now, when the opposite data was actually reported.  Pricing fluctuations rarely indicate the value of a company, but always indicate whether there is a buying opportunity for an asset, or if the asset should be overlooked for a better opportunity.

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