why we should love corrections (seryosong usapan muna)

Generally unpleasant
Corrections are associated with unpleasant things. I remember when I first tried buying stocks. I did it with two unexperienced friends. We made our debut into Philippine stocks last year when the market was reaching new highs around the 3800 level. Shortly after, we saw a major correction in the Philippine Stock Market and watched the value of our new stocks plummet. We didn't like it. Luckily, we were patient, and since it was just a correction, the values returned to our entry levels and after a lot of waiting, rose a bit to give us our first taste of gains.


It can be a good thing
After almost a year of watching the stock market, talking to people about it and reading related material and news, I have a different view of corrections. I think it can be a good thing for various reasons, here are a few that I want to highlight:

1) It makes everyone cautious
2) It makes investors more discriminating
3) It reveals which stocks are quality stocks
4) It shakes off the careless and ill informed investors
5) It exposes the real value of stocks
6) It opens up buying opportunities



Caution
When markets rise day in and day out, investors can get careless. When prices drop, all that carelessness goes out the window. We then have an opportunity for everyone to pause and ask the important questions like why did prices drop? Will they keep going down?


Discriminating investors emerge
With investors asking important questions about the businesses that they own equity in, information begins to proliferate. Analysts keep working and churning out information useful in decision making. Investors in turn, swallow up the information ravenously. The result is a well informed investor community that becomes more discriminating in their choices.


Quality Stocks
Even when markets turn sour, there are still some stocks that go against the flow. When markets correct, we'll see which ones these are. Then we can study them and possibly end up adding good quality stocks to our portfolio.


Careless investors run away
When losses occur in the market, the immature investors who don't know what's happening and don't care to find out usually run for shelter. Often it is to everyone's benefit that they do. A careless investor community is not good- for themselves or the people in general. The chinese government is fearful because their citizenry is begging, borrowing and stealing, so to speak just, to invest in stocks. It may be because their bubble has been growing so fast and steadily that people have forgotten that money can be lost if they are not careful. Maybe a good correction is in order there. In the Philippines many uniformed consumers bought into equities via U.I.T.F.s and lost big time because they didn't understand how it worked. They'll know to stay away next time or return well informed.


Real value of stocks
As early as feb last year, we saw world markets being rocked by news of a brewing sub-prime mortgage credit crunch in the United States. For those, like me, who were unaware of its magnitude, that correction made me rather aware of it whether I wanted to be or not. Many investors were so bullish at that time that they believed we'd see the Philippines Stock Market's Index (a.k.a. Phisix/Psei)hit 5000 points in 2007. Yet, with a slowdown or a recession in the U.S. looming in the horizon, business projections the world over had to be adjusted. A well informed person will see all this before the correction, but the correction will let everyone in on it. Then the value of the stocks will return to levels closer to what they really are at.


Buying opportunities
When markets become oversold, bargains appear. Stocks become relatively cheap and people with ready capital get to pick and choose.