Corrections Are Healthy

In times like this, it is no surprise many investors are experiencing some trepidation. Let them panic. You, however, should proceed knowing that corrections are healthy.

Allow me to take you back in time to the mid-1970s when I was in high school.

Several (most) of my high school courses never interested me. I never envisioned how some of the material being taught would ever apply to me in real life (BTW - they never have).

Some subjects were like a poke in the eye with a bloodstick!

We would have to read Shakespeare, Chaucer, etc..

Imagine a final exam where you have to compare/contrast the works of two books by different authors. I didn't even know what they were trying to convey. How could I compare/contrast some 'literary masterpieces' to which I would doze off within the first 10 minutes of reading them?

What had I ever done to warrant this punishment?

Don't get me started with poetry! Couldn't the poets write in terms that could be easily understood?

On the very rare occasion, a snippet of a poem would resonate with me. One such poem was Rudyard Kipling's 'If'.

Strange as it may seem, the first verse of the poem has, to this very day, stuck with me from the time I first read it in 1974.

If you can keep your head when all about you

    Are losing theirs and blaming it on you,

If you can trust yourself when all men doubt you,

    But make allowance for their doubting too;

If you can wait and not be tired by waiting,

    Or being lied about, don’t deal in lies,

Or being hated, don’t give way to hating,

    And yet don’t look too good, nor talk too wise:

The two segments that resonate the most with me are:

• If you can keep your head when all about you are losing theirs
• If you can wait and not be tired by waiting

...which brings me to the importance of these words while we experience a healthy correction.

Interesting Times

Investors who started investing after The Great Financial Crisis have never really experienced major market pullbacks. Sure, we had a little pullback for a few months in 2020 when the world ground to a halt because of the onset of COVID. Many retail investors, however, who began investing in 2020 have never experienced 'interesting times'.

Think back to the crazy investment behavior we witnessed in 2020 - 2021.

• SPACS with no underlying business trading at ridiculous share prices.
• Money losing operations trading at increasingly higher share prices.
• Investors listening and acting upon advice from a 'roaring kitty'.

Some investors found themselves being the greatest fool in the 'greater fool' theory.

Despite all the stupidity that occurred while people were in their pajamas while working (gambling?) from home, irrational investor behavior still exists. Some people still rely on share price behavior to make investment decisions.

Buffett and Munger Advice

Over the years, Charlie Munger and Warren Buffett (Berkshire Hathaway) have often advised investors to:

Invest in a business any fool can run, because someday a fool will.

I suspect they also meant the same applies to country 'leaders'.

Many investors, however, have ignored their sage advice thinking 'this time is different'.

Recently, some investors have come to the realization that their 'investments' are not truly 'investments' but rather 'bets'. Others? They're still 'deer in headlights'. Don't be such a deer.

Investments Versus Bets

We each have our respective goals, objectives and risk tolerance. What may cause one investor to experience 'heart palpitations' might have no effect on others; a 'bet' to one investor may be viewed as an 'investment' by others.

For me, an investment is something that leads to no loss of sleep. Sure, share prices may plunge. I do not worry, however, if this plunge is not attributed to a permanent impairment in the business. On the contrary, corrections are healthy and present an opportunity if you can keep your head when all about you are losing theirs and you do not tire by waiting.

Take, for example, S&P Global (SPGI). In my recent post, I disclose the purchase of additional shares. I conclude that post stating:

Since there is a reasonable probability that SPGI's share price may experience further weakness, I purposely acquired only 100 shares on March 4, 2025. I fully intend to acquire additional shares if SPGI's valuation improves.

As luck would have it, the share price has fallen further so I acquired another 100 shares at a better valuation.

Is SPGI likely to go out of business because of what is currently happening in the world? Probably not.

Another great company is Intuitive Surgical (ISRG). I last covered this existing holding in this January 25, 2025 post when its valuation was in the stratosphere. At the time, shares were trading at ~$584. Now? ~$477. Has the company's long term outlook fundamentally changed in less than 2 months? I don't think so. I have not yet added to my exposure but I am monitoring it closely.

In addition, consider companies such as Blackstone (BX), BlackRock (BLK), Brookfield Corporation (BN), and Brookfield Asset Management (BAM). These companies are poised to benefit from a world in turmoil.

Focus on companies with a TON of liquidity that are industry leaders. Capital light companies that generate considerable recurring revenue are also worthy of consideration.

Go right ahead if you want to 'bet'. Just remember that not all bets are in your favor. On the other hand, you can make a lot of money if you invest in great companies at attractive valuations and you are prepared to let time be your ally.

Share Buybacks

Share buybacks, when used wisely, are a great means by which to improve shareholder returns.

Retail investors typically acquire a few hundred shares at a time (often less than this). When a company repurchases shares at attractive valuations, however, the 'weighted average diluted shares outstanding needle' really moves. When done repeatedly (and wisely), this often has a meaningful impact on an investment's return....to a far greater extent than buying the occasional few hundred shares.

We need to be extremely careful, however, that the company's share-based compensation (SBC) does not offset the share buybacks. It does little good for the average investor to invest in a company repurchasing shares at $X only to be issuing shares to insiders and employees at, for example, $0.2X.

We also have to consider how Free Cash Flow (FCF), a non-GAAP metric, is calculated. In several recent posts, I look at a company's FCF calculated with/without the exclusion of SBC.

Many technology companies reward their insiders and employees with significant SBC. While these folks may be 'making out like bandits', all the other investors are being 'left out to dry'.

Dividends

I like share buybacks when done wisely. My opinion about dividends, however, is mixed!

I can appreciate why some investors who desperately require income might be attracted to companies with attractive dividend metrics. My preference is for a company to allocate its capital in a manner that is apt to have the greatest positive impact on long-term shareholder returns. In some cases, reinvesting in the business or repurchasing shares can be far superior to dividend distributions.

The drawback to investing in a company with a reputation for consistently increasing its dividend, is that the company becomes trapped. Its investor base EXPECTS dividend increases.

Suppose such a company experiences a plunge in its share price because of irrational investor behavior. If the company's investor base did not rely on the company's dividend, the company could allocate a greater percentage of its capital toward the repurchase of undervalued shares. When the investor base EXPECTS a dividend, the extent to which a company may be able to repurchase attractively valued shares is hampered.

The manner in which Real Estate Investment Trusts allocate capital is one reason why I avoid such investments.

Final Thoughts

Corrections are healthy. Let other investors 'run around like chickens with their head cut off'.

Ensure you have ample liquidity so you do not find yourself in a position of being forced to make unwise decisions at an inopportune time.

I am cautiously optimistic the current healthy correction is far from over. Although I am not aggressively deploying liquidity, I have made very minor additions to the following existing holdings:

• Chevron (CVX)
• Church & Dwight (CHD)
• Exxon Mobil (XOM)
• Johnson & Johnson (JNJ)
• Paychex (PAYX)
• S&P Global (SPGI)
• Visa (V)
• The Royal Bank of Canada (RY.to)

In addition, 3 young investors I am helping on their financial freedom journey have a combined high 5 - low 6 figures in cash waiting to be deployed when things 'truly turn ugly'.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.