Nasdaq Is Officially In A Correction Territory: What Is Next?
9 September 2020
The adage that “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” by Benjamin Graham could not be more true over the past few days.
As of 9 September 2020, Nasdaq is officially in the correction territory – which is defined as a 10% drop from its most recent peak.
So what is next?
It is worth noting that the stocks that suffered the worst sell-off since the March rout are all the US technology stocks.
Tesla lost more than a fifth of its value, about 21% in just one day.
I have often said that valuation matters in the long term. Here’s an article on my thoughts after the deepest market decline recently since June.
If a company drifts too far away from its fundamentals, it will eventually correct itself over the long-run.
If there is one thing that I have learned through my experience in the stock market is that the short term market movement is unpredictable.
The longer-term market movement, however, is more predictable, provided one does not pay an exorbitant price to participate in it.
When the disconnect between the real economy and the stock market drifts too much, the market will eventually correct itself.
My personal portfolio is equally balanced between growth companies and value/turn-around companies, and hence, overall, I am not as affected by the recent drop.
Some of the stocks I have actually gone up in value during the recent market rout.
So moving on:
#1. The market could continue to be irrational
If someone buys or sells a particular companies’ stock based on their story with disregard on fundamentals, it can go up or down in an extreme direction.
With the ease of trading in today’s environment, the market could continue to be irrational, and we can see this correction recovering back to the previous high soon.
#2 The market will be more rational
If the market is more rational, we will start to see some rotation into the companies that are better priced in relation to its future growth and fundamentals.
So if the market is more rational, my view is that there will be further selling pressures for companies that went up way too much in relation to their fundamentals.
Margin of safety is paramount in investment.
That means that we need to be patient enough to only buy when it makes sense to buy – and at a valuation that we think offers us “margin of safety” in case, we got it wrong on our business analysis and valuation.
Be rational in an irrational market.
That is the only way we can survive and make sustainable gains over the long-term.
Because ultimately, valuation matters.
Try not to overpay.
Be it growth stocks or not.
We should not FOMO and overpay – especially not after it has run up too much and the valuation starts to not be mouthwatering, investment-wise.
Remember that to finish first, we must first finish.
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Disclosure: I am/we are long on Facebook and Carnival Corp.
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