For stock market participants, 2016 has not been a happy new year, at least not yet. The degree of volatility Mr. Market has served up thus far has no doubt stirred a little panic among many. Here we go again.
Stock markets are nothing more than a bunch of cycles put together. While we all wish these cycles are also moving higher, that is not going to be the case. When cycles lengthen, they are either considered bubbles when stocks are climbing higher or crashes when stocks head lower. What we have going on today is yet to be determined. Are we going to have a natural correction or is this the beginning of a heavy selloff after years of stock market gains? Whatever is going to happen, the secret sauce for investors is patience.
In this case, patience can come in two flavors. You can be patient and wait for complete capitulation. The problem here is that if the intent is to time the bottom perfectly, that begets a more speculative activity. There are some very interesting prices out there today in a variety of businesses. The Container Store (TCS), which I wrote favorably about at $7 a share, now trades for $5 after a disappointing earnings report. Alcoa (AA), which is splitting in two separate business this year that arguably are worth $12 to $14 per share, is now trading around $7. Trying to wait for even lower prices may end up being an exercise in futility.
The second flavor is the patience required once you own a security. The stock market, in my view, has always been the mechanism for the production of long-term wealth creation. Over many years, the power of compounding allows for significant capital gains. But long-term does not mean six months or even a year. Looking back at banking stocks in 2008 and 2009 is helpful. After being decimated, owners of bank stocks were aptly rewarded over the next several years. Wells Fargo (WFC) went from under $10 to over $50. Bank of America (BAC) from $5 to over $15. It took years, but the returns were worth it. (Wells Fargo and Bank of America are part of TheStreet's Action Alerts PLUS portfolio.)
Market volatility is injurious to the impatient investor. With the prevalence of automated trading, rapid-fire selling provides gas to volatility's fire. So if you can't take the heat, there is nothing wrong with getting out of the kitchen.