‘Irrational,’ ‘Ugly,’ ‘Unprecedented,’ and ‘Worse than ever before.’ These are all terms I’ve heard to describe the market in the past three weeks. When hearing this, the question an investor has to ask them self is the following: How are the fundamentals of the companies we invest in affected by the share price the external market places on them?

If you have someone who yells “Fire!” in a crowded gymnasium and a crowd rushes for the door, our natural instinct is to run with the group. In doing so many will get hurt rushing for the door since the crowd can do a lot of damage trampling those who can’t fit through the opening. And then when the majority of the people are outside, someone will yell that it was a “False alarm.” When this happens, what is the net result? Many people were hurt following the crowd and a lot of mayhem could have been avoided if we would just stop and think before reacting.

I mention this because markets are off to the worst start on record. The stock of good, strong companies are dropping. But in many instances the business the companies are currently engaged in are holding steady and in many cases, increasing. So, what action should we be taking?

Follow the crowd and sell into the fear?
Reexamine the companies we are invested in and see if anything has changed that will ultimately affect the share price?
Stick our head in the sand?
Throw caution to the wind and invest like crazy?
Manage our stock investments by selling those that have a fundamental change because of the external factors (like price of oil or consumer sentiment and actions) and buy into good, strong companies that have had their share price beaten up from the crowd following the panic?

One thing I’ve learned is that the markets will rise and fall because of irrational reasoning, such as momentum, news, panic, etc. What we have to do to make money in the long term is not to follow what we are hearing on the news and be lemmings falling over a cliff to our deaths because the one in front of us did. Rather, we should make sound financial decisions based on financial facts of the companies that we are invested in.

So with that said I have been reexamining all of our positions and pruning the ones that have had a fundamental change, as well as selling those that are currently above their business value. What this is accomplishing for us is that we are getting more and more cash available to buy good, sound companies whose share price has been beaten up because of the crowd following. This gives us the opportunity to make great capital gains as things recover.

Our economy is actually improving (unemployment is lower, gasoline is lower so we have more spendable income and our cost of goods will lower over time (or at least not rise as fast)). I believe we will see better days ahead, not only for our economy but also for our stock investments as well.

A word of caution is a quote that is attributed to economist Maynard Keynes. “Markets can remain irrational longer than we can remain solvent”. So with that said, I will continue to prune where I see it to be necessary, only adding new positions when we can see a solid bottom forming that shows upside movement.