We are going to take a break from our regularly scheduled program to address market volatility.
Apparently, a lot of folks have forgotten -- or, among younger investors, never knew -- that stocks can go down. Not only that, but when they do go down they have a nasty tendency to go down quickly. Almost everyone I have talked to the past few days has asked me what is wrong with the market right now. The answer is there is nothing wrong with the market. If anything, there was a problem with the market when it continued to climb to new highs in the face of massive geopolitical turmoil and a clearly slowing global economy. This selloff is completely normal.
We can discuss the reasons for the selloff all day long if you would like. Oil is falling and that's causing layoffs and there is a real fear of bond defaults across the energy patch. Japan is a hot mess and Europe is not far behind. Twenty percent of the developed world's economies now operate with negative interest rates. The Middle East is one off-target bombing run away from World War III. The U.S. economy is mired in a semi-permanent state of better-but-not-good. Earnings are lousy. Pick a reason. There are plenty of reasons for stocks to go down and very few for them to go up right now.
If you are still in the wealth accumulation phase of your life, this should be cause for celebration, not concern. The opportunity to buy good companies and quality assets at lower prices is a good thing. I am not enjoying watching my energy-related holdings fall any more than the next guy, but I am more focused on finding the survivors so I can add to my position in anticipation of a payday sometime in the next decade.
More importantly, I am looking at the cash stockpile I carried into 2016 and getting excited about the chance to put it to work at great prices. I took a lot of flak for holding high cash balances at a zero interest rate, but I feel pretty good about it now.
The main thing to keep in mind right now is that the S&P 500 is not even down 15% on the year. The Russell 2000 is down a lot more than that and is flirting with the down 25% level, but that index contains a lot of small biotechs and energy companies that are just getting blasted right now. When I ran my screens this morning, we are not seeing widespread inventory creation but, as I said not long ago, we are getting close. It is time to drag out those "buy in a crash" lists and start doing the homework in our search for bargains.
Bank stocks are getting hammered in here. Concerns about low interest margins, oil-related loans and slowing economic growth are cited as the main reasons for the selling. While all that is true, I do not think we are seeing the type of balance-sheet damage we saw in 2009, with the exception of a few banks that are massively overweight energy loans. I am watching Citizens Financial Group (CFG) shares to fall below book value and getting pretty interested in buying this high-quality regional bank. It has very little energy exposure in the loan book and management has the bank in a good position to perform well even if rates stay low for longer than the market anticipated.
Speaking of banks, my little community banks are not getting hit very hard at all just yet. My trade-of-the-decade portfolio is down a little over 3% so far in 2016 and up over 14% for the last 52 weeks. I am having some success sitting on the bid of some of my even less-liquid stocks and waiting for a forced or discounted seller to dump a few shares my way.
I was asked last night if a recession would be horrible for the little banks to the same degree as it would for the big ones. The answer is that, from an earnings point of view, it would not be good, but M&A would accelerate at an even faster pace as the larger banks stepped up their attempts to buy growth and the small banks became even more willing to sell.
I have no idea what the markets will do in the short run, but if I am taking a long-term private equity view of the world, the lower prices go today, the more money I will make over the next decade. I came into the year preaching cash, community banks and special situations. That is still my battle cry as market volatility picks up and I will be delighted if markets continue to fall and create a bucket full of bargains.
Traders may hate falling markets, but investors should learn to love them.
Tomorrow, we will go back to those REITs I think you can buy right now.
