Reminders for Market Sanity

Following the stock market's steep decline on November 20, Paul Larson, an equities strategist at Morningstar, penned the article "Five Reminders for Market Sanity."  As follows is an excerpt:

It has been yet another very rough day to be an investor in stocks, with the S&P down another 7% today and approaching a 50% loss for the year.  Let's not mince words.  This is literally the worst market crash since the Great Depression.  We've been living with the incessant volatility and downward movement in the markets for months now, and I am at loss for words that I have not already uttered several times before.  Here is what I keep reminding myself while trying to keep my head in this difficult time...

  1. The market is inherently volatile, and there is no telling when the volatility is going to stop (or where the bottom is).  Only invest money that you will not need for a couple of years.

  2. We are in a recession--one that is going to be more severe and protracted than average.  However, that does not mean the end of the world.  Our country has lived through many recessions before, and we will live through this one, too.

  3. The intrinsic value of a stock is the value of the discounted cash flow the underlying business will generate in coming years.  The cash flows of our companies are not anywhere close to as volatile as stocks have been recently.

  4. While our companies are dealing with the recession and we are likely to see a material contraction in earnings in the coming quarters, this does not mean that the companies are in permanent decline.  The market likes to extrapolate recent short-term trends, but those extrapolations lead to wrong conclusions in periods like this.

  5. All the evidence I have points to the fact that very many stocks are ridiculously cheap, assuming we are not headed toward Great Depression Part Two.  (An assumption I'm willing to make, given the massive and global government stimulus being applied.)  As I've said before, valuation ratios in the modern stock market have never been this low without high inflation, and inflation is the last of our concerns at this moment.