Last Friday, it all got too much.

The Nasdaq tanked 5%. Investors sold off, and we saw some of the worst carnage since 2020 when the world was first stricken with Covid-19.

But it didn’t stop there. The sell-off gathered steam and continued into this week.

Some investors will be fearful. Retirement balances have dropped. A few will be so fearful they sell into the losses or move their plans from growth funds into balanced funds or cash.

If you were invested in 2007 — or in March 2020 — this week is merely a blip. Yet it is on the back of a deep and rumbling thunder reverberating across the financial world.

  • Central banks are late to inflation-fighting. Many worry it is out of control.
  • Hiking interest rates is a blunt but necessary tool. But we don’t yet know how many rises will be needed and how big the next kicks will be.
  • The war in Ukraine poses a wider threat to Europe and the world. It shows no signs of abating.
  • Aggressive lockdowns feature in China. The property market is in trouble. Meanwhile, reshoring of essential manufacturing is threatening the growth story of a giant economy.

Despite all this, one of the world’s most revered investors is buying. Sitting on a large cash pile, he now appears to be waking from a slumber.

Yes, Warren Buffett is up for it.

There were a slew of announcements recently on Berkshire Hathaway [NYSE:BRK.A] taking major positions in value stocks.

One of those was HP [NYSE:HPQ] — the printer and laptop people. One of America’s oldest tech businesses.

We first saw a potential bargain in HP back in October 2021 and wrote about it then in our Premium News Service. Our dedicated readers who read about this opportunity and captured it have clearly benefited.

Now, with markets unsteady, more of these value opportunities are emerging.

The hard part? It takes considerable financial courage to buy into distress.

Bear markets, when a longer term drag begins, can test the patience and will of even the most experienced investor.

History tends to show us that markets do increase over time. They have more good years than bad. And rapid gains often follow periods of steep decline.

But to expand an analogy of Buffett’s — most swimmers aren’t able to cope when the tide goes out fast. They’d rather go home.

 

 

So how do we cope with sudden drawdowns?

 

First, get a handle on the overall market direction and sentiment.

The VIX Index can give you a sense of volatility and thus fear.

When it’s highly elevated, there may be ‘blood on the streets’. When it’s subdued at a low level, you likely have a stable market ripe for growth.

Then there’s the pre-market stock futures for the US markets. These indicate whether the market is likely to head up or down on the next trading day. And potentially by how much.

In saying that, you can pay too much attention to the market and get caught up in it.

Every day, great companies are oversold. And the real questions come down to earnings, earnings growth, asset value, and valuation growth.

  • Right now, I’m seeing a phenomenal business model now down 25% this past month.
  • Was the revenue down 25%?
  • Are sales likely to fall by this much over the next few months?

Unlikely. The Company’s revenue was up more than 70% last quarter, year on year.

I’m also seeing a real estate business with properties discounted by up to 30% in the share price. Valuations are now starting to lift.

These businesses and more are currently being covered for subscribers in our Premium News Service.

 

The bottom line

 

Don’t fear market drawdowns, corrections, or even crashes. At least not too much. They can create opportunity for those who’ve done their homework.

A market correction means some great companies will get priced lower than their actual worth due to fear.

Of course, it is also true, that some of the most resilient businesses will hold their value while others fall. This is observed by watching many different industries over the years.

So, is the market is ripe for a worse crash now? Given all these risk events?

Nobody knows.

But I do see this…

Markets are awash with cash. Buffett is not the only one sitting on money.

Interest rates are still historically quite low. So it’s hard to find return anywhere else. And the housing market, which relied on ultra-low rates following Covid-19, is now in for a rude awakening.

I’m willing to speculate the stock market and well-run businesses in general were less reliant on ultra-low interest rates. They can withstand some increase.

If you believe that, a deep correction could in time be followed by a very swift uplift.

In that case, fortune will favour the brave. As it often does.

 

Regards,

Simon Angelo

Editor, Wealth Morning

Important disclosures

Simon Angelo owns shares in Berkshire Hathaway [NYSE:BRK.B] and HP [NYSE:HPQ] via portfolio manager Vistafolio.  

(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)