Cool Heads Will Prevail

Includes: DIA, IVV, QQQ, SPY
by: Todd Kenyon, CFA

It's times like these that make you realize how tough this "game" can be. Selling in many sectors appears indiscriminate and there seems to be no end in sight.

Certainly there are some external factors contributing to the slide, not the least of which is the weak dollar. Although the S&P500 is still up 4% for the year in dollars, it is down 6% in Euros. Additionally, domestic equity funds have been experiencing huge outflows while international funds see massive inflows. As both domestic and international investors move away from US markets, the sectors that haven't been working (anything other than M-E-I-T) get hit harder and harder.

It is natural for the human psyche to extrapolate recent negative action into the future, especially when it keeps happening. It can be quite demoralizing to see things you own, and new holdings you add because they look cheap, continue to go down. Now more than ever, one needs to focus on the underlying businesses and long-term prospects of their stock portfolios, and avoid getting wrapped up in Mr. Market's mind games. Don't let him scare you out of high-conviction holdings. Remember why you own them in the first place, and use declining prices to average down. Sure, things may keep going down in the near term, but one day this will all be forgotten, and Mr. Market will suddenly start paying attention to your holdings' fundamentals. It could be tomorrow, it could be in 2009, but it you bought right, it should pay off.

Remember this: You make the most money in a bear market, you just don't know it at the time. I am taking this to heart, it has worked in the past and I believe it will work this time. I am finding many high-conviction, high quality ideas where I am initiating and adding to positions.

I don't know about you, but when supermodels start thinking they are currency experts, I can't help but feel the bottom is near. It was the same in 1999 when taxi drivers became technology experts. Bottom line, ignore the noise, don't become paralyzed by Mr. Market's machinations, buy good companies for good prices, and hold tight.

As JFK said, "There are risks and costs to any program of action, but they are far less than the long-range risks and costs of comfortable inaction."