So, the Dow Jones Industrial Average (INDEXDJX: .DJI) has fallen 10% over the past four days.
As of yesterday’s close, the DJIA is down almost 13% from its peak. The S&P 500 (INDEXSP: .INX), an index with 500 companies, is down a little over 12%. That means that we are in a market correction, as popularly defined.
While the decline has been swift, the magnitude of the fall is also well within historical norms.
According to a study by Morgan Housel, a 10% decline in the S&P 500 happens every 11 months, on average. A 15% decrease occurs every 24 months. And a 20% crash has historically taken place every four years.
I’ll state again, we are well within historical norms.
As investors, we should expect such downturns to happen from time to time. So, get comfortable. It’s time to look for bargains.
Outbreak of pessimism
The effect of the coronavirus outbreak is starting to sink in, both at home and abroad.
Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL) have been impacted by the slow recovery in the personal computer and smartphone supply chain in China.
Mastercard (NYSE: MA) is expecting slower growth due to reduced travel and the associated cross-border transactions. Online booking site operator, Booking Holdings (NASDAQ: BKNG), is projecting a 7% decline in sales in the current quarter.
To me, all four companies qualify as bellwethers of their respective industries.
And all four forecasts are not promising for the current quarter.
In other words, some companies are experiencing real damage to their business.
Shopping for bargains
The late Napoleon once said that a military genius is …
‘The man who can do the average thing when all those around him are going crazy.’
The same applies to investing. While there may be bargains today, not every cheap stock is worth your hard-earned dollars.
There are three rules that I adopt when it comes to bargain hunting:
- Buy because you want to own the company and not because the stock has fallen.
- Fallen stocks are not the only opportunities.
- Buy with conviction. After that, be humble.
The three actions above may look like common sense. Yet common sense may not prevail in times of heightened fear.
For me, it’s time to go bargain hunting, and find the best companies to own for the long haul.
If you’d like to see how I sieve out the best stocks to buy, sign up for our FREE investing newsletter, Get Smart. I’ll be covering that in next week’s edition. CLICK HERE to sign up.
Disclosure: Chin Hui Leong owns shares in Mastercard, Apple and Booking Holdings.