![\"\"](\"https:\/\/strawman.com\/blog\/wp-content\/uploads\/2022\/02\/tech-bear.png\")
<\/figure><\/div>\n\n\n\nSo what’s going on?<\/p>\n\n\n\n
The basic answer is that sentiment has changed for the worse. Higher inflation, and hence the threat of rising interest rates, is perhaps the biggest factor, but a possible war in Ukraine, an ongoing pandemic and a tapering from the US Federal Reserve are likely having an impact too.<\/p>\n\n\n\n
It’s perhaps also fair to say that many companies — especially technology companies — were previously trading at very high levels. Prices that assumed very strong and enduring growth. And when stocks are ‘priced for perfection<\/em>‘, it doesn’t take much disappointing news to send investors rushing for the exit.<\/p>\n\n\n\n It’s a good reminder that valuation matters. As Charlie Munger puts it:<\/p>\n\n\n\n \u201cNo matter how wonderful a business is, it\u2019s not worth an infinite price.”<\/em><\/p>\n\n\n\n He goes on to explain that for him and Warren, “We have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life<\/em>.\u201d<\/p>\n\n\n\n The good news is that if you have indeed purchased your investments at a sensible price, these losses will prove transitory in the fullness of time.<\/strong><\/p>\n\n\n\n At the same time, if you paid silly prices for your shares — especially for those representing low quality, speculative businesses — you could well be facing the prospect of permanent capital loss. Holding firm, or worse, buying more, could just be compounding your initial error.<\/p>\n\n\n\n So in terms of what you should do in the face of falling prices, the answer depends on what you’re holding and how the current price compares to a reasonable estimate of fair value. And this needs to also be considered relative to alternate investments — opportunity cost matters.<\/p>\n\n\n\n Howard Marks dives into this idea in more detail in one of his memos to clients, and we’d encourage you to have a read if you’re wrestling with the decision of whether you should sell out, or not. (Thanks to Strawman member Slideup<\/a> who posted this during the week).<\/p>\n\n\n\n Click here<\/a> to read the memo.<\/p>\n\n\n\n Finally, it’s worth remembering that what we are presently experiencing is entirely normal. The market has always climbed a wall of worry, and long term gains are achieved in spite of regular (and sometimes extreme) pull-backs.<\/p>\n\n\n\n Some recent tweets from Morgan Housel<\/a> and Ben Carlson<\/a> demonstrate this perfectly (click on the image for a better view).\n\n<\/p>\n\n\n\n