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Surviving the Tempest

At a certain point in every market the focus shifts from (1st) making money to (2nd) not losing money to (3rd) simply surviving—making it to the other side.

The kinds of companies that will hang on are those that produce sufficient cash flow during the ‘storm’ to self-finance operations. The cost of money (i.e., debt and equity financing) gets more and more expensive, and for many firms evaporates entirely. It’s a self-fulfilling cycle where firms able to issue debt or equity during the good times all the sudden need more to fund operations, rollover maturing bonds, or both. One can see how, even with positive cash flows, a company without adequate cash reserves to meet maturing bond obligations[1] could rapidly devolve if not able to issue bonds anew to pay off the old.

The Bear’s Toll

The first half of the year was one of the toughest on record—the worst since 1970, in fact. Markets were once again roiled in June as the S&P 500 declined by -5 percent or more in three of the first six months of the year. The last time that happened was 1932 (granted, it was much worse).

Source: Robert Shiller, Yale University; Canterbury Tollgate

Inevitably the emotional toll of a bear market, provoked by the apparent obstinance of declines, leads investors to extrapolate. They quite naturally begin to envisage the most dire outcome.

In these times there’s one question to ask: Will what I own be around in five years? If so, then things will turn out alright. If not, get out. The key is fortitude. Ultimate success in markets will always [eventually] go to those with (a) quality holdings and (b) the endurance to hold on. Bear markets and 30 percent +/- declines are not out of the ordinary. Neither is the average investor’s tendency to buy and sell at the worst possible times.

To a large extent, the counterintuitive yet crucial trait is one’s capacity for near- to mid-term price insensitivity---to govern that pervasive yearning to buy because prices rise and offload when they tank.

Yet the most challenging part is reacting when things change—to avoid holding on just to prove you’re one of the few who can.

Keep the faith. Don’t let the bad wolf win.


[1] Corporate and government bonds are most often interest-only until the bond’s principal comes due at maturity. Each bond is issued at a face value—typically $100 or $1,000—which is the amount each buyer of the bond is lending to the borrowing entity. The buyer at issuance buys at par (aka “face value”) and receives interest payments semi-annually until the bond’s maturity, at which point the bondholder is then due the face value.

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