Corrections are a healthy part of any market and it’s important to understand the underlying fundamentals and what influences are taking place during them. Although the TSX Comp has shed some 5.8% since its recent 52-week high, I want to point out a few things that help me to focus during declines such as this.
First, a correction of some sort had been expected for some time. Market have gained considerably in the face of adversity in the US housing section, a rising CDN $ and credit worries regarding financing of large corporate & private equity takeovers. On days like this I enjoy having a broad watchlist of stocks covering a wide range of companies. It helps me to put into perspective what is actually happening vs. the doom & gloom that you hear through many media streams.
Understand that for the most part, a premium had been priced into the market with the rampant and feverish merger & acquisition activity of names such as BCE, CP, Alcan, etc. The news of Brookfield Asset Management approaching Canadian Pacific back in April helps to show that ridiculous premium that the market is willing to price into assets. No one really knows what potential suitors, if any, the company is currently entertaining, but the price jump above $90 was a ridiculous premium based on speculation. A correction like we’re experiencing is simply eliminating such speculation and focusing the market back on fundamentals.
The market is also realizing that eventually massive amounts of credit can’t be as easily acquired as in the past two years. Everyone has a margin of safety and the banks especially will always focus on covering their own rear ends when push comes to shove.
I do believe that the ongoing fundamentals of the Canadian market are present to continue appreciation beyond the highs we’ve already seen. But I think the “easy money” is in the past. This will become a more volatile market with swings up & down in wide ranges making investors more concerned with asset preservation. Inflation will continue to be a concern, but interest rates are still near historical lows.
I myself am closely monitoring my watchlist in anticipation of attractive valuations of companies I’ve wished to hold for some time. But I’m not yet convinced that most of the market has come down to reasonable valuations, so I’ll continue to be patient, focus on fundamentals and continue to tell myself that quality companies that fit my investing objectives are worth waiting for.
Remember: Don’t go to the market, allow the market to come to you. If you miss a stock at a target price, there will always be another day that will offer you that opportunity. Understand the risk, focus on fundamentals of the companies you’re focused on holding and the rest will fall into place. Allowing emotion to dictate your activities in times like this will simply force you to lose focus and abandon your investing strategy & objectives.