Santeri Korpinen, Sifter Fund

The stock market correction – What really changes when stocks fall?

Over the last century, equities have performed the best among various asset classes. The equity investor has paid for this return by tolerating the risk associated with changes in share prices. The year 2022 opened into a sharp decline in stock prices and many investors are wondering again how to act now? What really changes when stocks fall?

Long-term stock investors do not join a crowd of hysteria on the selling edge when the market is nervous. He has a clear strategy that he sticks to. The long-term investor has invested in high-quality, growing companies with strong cash-generating capabilities. He knows he owns a small share of the cash flow & dividends and wants to own those companies for a long time.

This is how the Sifter Fund operates. Quality investing brought a 34.3% annual return to fund investors in 2021.

Why would an investor sell out future cash flows at a discount when he knows the company’s fundamentals are in good shape?

Let’s approach it through an example. You are an entrepreneur and have been building your company, products, and customer relationships for years. You know you have a quality business that has value now and more in the future.

There will be an economic crisis, a stock market crash, and difficult times in the market. You will be offered half the value of your company. The company’s ability to make money may be momentarily weakened, but your company’s competitive advantage has not eroded. Would you be willing to sell your quality cash machine for half the price off?

The same analogy applies to carefully selected quality stocks. Naturally, a buy-and-hold strategy will not work if the portfolio is full of overpriced companies whose prices do not match their ability to make a profit in the future or if the competitive advantages are permanently weakened.

In this case, the investor has paid a premium for bad business, and it is worth selling the shares immediately. In the words of the legendary Warren Buffett:

“Fluctuations in share prices are not a risk. The risk is a loss of capital.”

Buffett’s partner Charlie Munger, for his part, points out that it doesn’t matter much what happens between the purchase and sale of a share. Business quality is everything.

A month ago, I wrote about stock selection, which is now more important than ever. What kind of companies should be in the portfolio if you want to be involved in the stock market?

Does it pay off selling the shares now at a profit and buying them cheaper later?

Sounds like a wonderful idea. However, timing and winning the market is most often a wish. It rarely succeeds.

The American research firm Dalbar examined the success of private investors who had invested in equity funds between 1995 and 2015. The study found that the annual return for private investors was 5.2% on average, with the S&P 500 returning 9.8% over the same period.

Thus, private investors lost 4.6 percent on the index.

One of the main reasons for losing the index was too much activity that typically occurred at the wrong time. Fund subscriptions by private investors accelerated as the market rose. Similarly, as stock prices declined or crashed, redemptions flooded to fund companies.

Greg Davies, who works at Barclays Bank and specializes in investor behavior, says an impatient type of risk-loving investor loses some 1.5 to 2 percent of the returns compared to buy and hold investors each year.

I am not claiming that market timing could not be successful from time to time but based on several studies and own empirical cases it is impossible to systematically predict market rises and falls. Guessing often takes both returns and nerves.

Stock markets rarely collapse when a collapse is most desired

In recent years, there have been several experts in the media talking about the danger of a stock market crash. It is inevitable that one of them sometimes hits the right one.

In the last hundred years, we have experienced four clear collapses. The stock market crash is part of its nature due to the reason that investors’ greed and euphoria of the human mind have obscured the light of reason.

Uncertainty is the price for an equity investor that must bear to earn decent returns on stock market.

Eventually, we will see a stock market crash again at some point. In the light of history, a single collapse has lasted an average of 18 months, after which stock prices have risen even higher. The Covid19 stock crash in 2020 was the shortest in history.

The fact is that no one can predict correctly when the stock market crash is starting.

Throughout history, stock market crashes have surprised investors on a quiet Monday morning when no one has predicted the crash.

Quality shares brought the Sifter Fund a return of 34.3% in 2021

The Sifter Fund’s investment strategy is to own high-quality, growing, and healthy companies around the world in all market conditions.

We have been doing this for 20 years soon. The fund has faced the financial crisis of 2008, the collapse of Covid19 in 2020, and a number of smaller market corrections.

Despite the huge corrections in the Fund’s history, the quality companies of the Sifter Fund have offered investors more than 10% annual return (2003–2021). In 2021, the Sifter Fund rose 34.3% and outperformed the Global Equity Index (MSCI ACWI, Eur) by 6.8%.

The added value of Sifter to the investor is the consistency of the investment strategy and discipline in complying with it. Sifter investors have outsourced some of their assets to an experienced team and get its full expertise at a reasonable price.

We’ve also written a 20-page guide on the subject: Long-Term Quality Investing.

Santeri Korpinen
CEO, Sifter Capital

Disclaimer. The contents of this page do not constitute investment advice or purchase recommendations for stocks. This page describes our opinions on the companies we have invested in or whose shares we have sold. The past performance of the fund is not a guarantee of future results.
Long-Term Quality Investing - Download the Guide
Long-Term Quality Investing – Download the Guide
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