Waterfall Decline

Surviving a waterfall decline requires fortitude and patience, both of which are usually in short supply after a dramatic fall from a seemingly placid market. A 2,000 point drop on the Dow Jones Industrial Average over the past 2 weeks has been brutal, there's nothing quite like seeing hard-earned money getting vaporized for seemingly no fundamental reason. The question naturally arises, now what?

Frequent readers of this blog are well aware of the Invest Like A Farmer mentality; we're buying shares (small pieces) in a business, and we prefer highly profitable, monopolistic companies with a steadily increasing left to right chart. We value boring here. By definition, most monopolies are resistant to sudden economic swings. An entire farm planted with the seeds of multiple monopolies is an even better position to be in, as it is extremely unlikely, barring an astroid impact, that all business on Earth will cease.

The major change after a waterfall decline is that a company's dividend yield is now higher since the share price has fallen and financial farmers can now pick up more shares at a lower cost basis. All things being equal, consumers will most likely continue to drink coffee, smoke cigarettes, buy smartphones, wear sneakers, take medicine, drive cars, fix the shed, user their credit cards, and see a movie. Indeed, prevailing monopolies often have the ability due to their strong balance sheets of further consolidating their respective industries.

On August 9th (check out the posting to verify!) I suggested that the dollar was king and a good 401K would be $401,000…given the fall we've seen over the past two weeks, and the past week in particular, it makes sense to review your holdings and identify promising candidates for additional seed capital.

Goldman Sachs had a great article this morning in the Wall Street Journal comparing this correction to 1998 rather than 2008 and the Bespoke Investment Group also had a very interesting piece identifying just how rare true waterfall declines are (this is the sharpest in 75 years!)

My advice remains constant; have a healthy cash reserve at all times, build a portfolio of boring monopolies (i.e. highly profitable companies that pay consistently higher dividends with strong left to right charts), and continually focus on the long-term objective of creating sustainable, generational wealth. Opportunities like this don't come along too often and it is important to seize them when they do.