Don't get off the train, May 2022 edition

image: Wikimedia Commons (link).

The vicious equity selling we have been witnessing in the markets is uglier than anything we've seen since the days of the dot-com crash of 2000 to 2002.

Different from the dot-com crash, however, is the fact that the selling is targeting some of the best growth companies for the most aggressive selling: these are legitimate companies with real business models and in many cases very strong earnings, and yet the price action we are seeing is as if the markets are looking for the strongest names and selling them mercilessly.

Professional traders with whom we work have noted that the selling appears to be driven by algorithms -- they are not seeing humans behind these trades. Instead, they see the market action as being primarily driven by automated non-human trading activity -- with perhaps as much as two-thirds of all trades being driven by high-frequency algorithms which are programmed to pursue the "meme of the day."

At present, the "meme of the day" involves variations on the theme of "inflation is bad for growth companies" and those are the companies that are being sold most aggressively. We have written about our reasons for disagreeing with this conventional wisdom -- see for example this previous post from January of this year. 

But sell-offs like the one we are witnessing now definitely create the kinds of times that really "test your mettle" and your convictions as an investor.

Our convictions are very clear and based on our own thirty-six years of professional investing experience, as well as the professional investing experience of our mentor Dick Taylor and of his own mentor Thomas Rowe Price, that owning shares in well-run innovative businesses is always the best way to weather the inevitable storms, and that shares in those companies almost invariably outperform on the way back up after those storms run their course.

While the storm is raging, however, we advise following our saying: "Be centered -- be still." 

We have written about this philosophy many times in the past, including in this previous post from 2011, in which we explain that when we say "be centered," we mean to "remain within a consistent discipline, and not make rash departures from that discipline." We also explain in that post that when we say "still" we do not mean "taking no action" but rather "continuing to act within the principles of an investment process."

One other phrase which we also offer to investors in times like these is the saying "Don't get off the train." We have written about this concept many times in the past as well -- including in this post which we published on March 2nd, 2009 -- just a week before the bottom of the 2008-2009 bear market. One month later, we wrote a follow-up post entitled "Don't get off the train -- revisited" with some reflections on why this concept is so important and how the events of the following month proved its validity.

The upshot of this saying is that investors should not panic-sell shares of good companies in times like these -- and those who have the means to do so might even consider selectively buying at these levels.

It can be very difficult to stick to one's convictions during times when the world seems to have lost its mind. However, we are convinced that the rules of good business and indeed common sense have not been repealed -- and we look forward to the day when they return.

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