Read Before the next Market Correction

Observations about sharp market corrections and their recovery.

1. Some of the best bits of the market are the exponential bits ahead of a correction. You have to participate in those exuberant moments or you’ll never get the averages. In other words, try not to be too fearful or cautious. Its a bit of a game. Enjoy the exuberant bits. Play the game when it is “on”. Laugh all the way to the top. Let the finger-waggers wag, they always do when people make a fortune with little effort.
2. Corrections are inevitable and regular. Expect a big one every ten years (50%), and a tradeable one every three years (10-20%). And regular 5% corrections.
3. Corrections come quickly. You don’t have much time to react. You have to be decisive. The stock market is not about certainty ahead of time. You never get that. Work on the balance of probability. If the market has gone up a lot and suddenly drops, the balance of probability suggests that that's a top. So sell. Yes, it may be wrong, but if the market is up a lot, there are more profits to be taken, and your only risk is not making money and not being a fund manager; underperformance is irrelevant. Play the odds. Sell when it could/should/might be a top.
4. Recoveries come slowly. In every major stock market correction, it takes much longer to recover than it does to crash. In the pandemic it took 14 months to recover what we lost in 23 days trade. Point being, you have plenty of time to buy for the recovery, plenty of time to decide when and what to buy. There’s no rush. You don't need to catch the bottom precisely. The market never crashes "up". So never bother catching the knife. I roll my eyes at people buying anything that's dropped a lot whilst it is dropping. Sell quickly, but buy at your leisure.
5. Don’t bother to buy defensive stocks when a correction starts. In a bull market, defensive stocks (TLS, WOW, COL, CSL, COH. ORG) will be some of the worst performers. In a market sell-off, defensive stocks will lose you less (they outperform in a falling market). But they still fall. You just lose money more slowly. So don't buy them. Don't read the articles saying "switch into defensive stocks". Any talk about defensive stocks is aimed at fund managers, not you. You do not need to outperform. Cash is your only defence in a falling makret. Not defensive stocks. Defensive stocks will not serve you unless you are an income focused investor in a bull market. Leave defensive stocks to the fund managers who concern themselves with their own relative, not actual, performance. For an individual investor, there is almost no point at which you would want to buy a “defensive” stock. They make less money in a rising market and there is no point holding the stock that loses you less money in a correction.
6. If you ever say “I can’t buy it, it's gone up 10% in a week” you will fail at investment. If you are the sort of investor who says "It's up 100%, I've missed it", you doom yourself to conservatism. Chickens don't make money. You will never bag a ten-bagger selling a 0.1 bagger - so anyone saying "I always sell on a 10% profit" is doomed to fail. Thirty five stocks in the All Ordinaries are up over 100% in the last year. 90 are up more than 50%. Do not sell because a stock is up (sell because its going down). In a recovery, you have to buy stocks that have gone up. And if the bottom was a while ago, sometimes you have to buy stocks that have gone up a lot.
7. No one knows when corrections are coming and those that appeared to (in hindsight), didn’t know for sure, they just made a fuss about it when they discovered (in hindsight) that they made the right noises at the right time. The best way to time a top or bottom is to read Marcus Today. Not kidding!
8. Do not think you will be so clever as to predict the end before it happens. You can't predict the big sell-offs, just be aware (as now) when some of the ingredients are in place, when "The Dam is full". A gauge is the average stock market gain rate. Call it 9% a year. If the stock market has gone up at a pace faster than 9% a year it becomes vulnerable. But don’t do anything about the signs of a market correction until the correction begins. We are in the reaction game, not the prediction game. Yes, become more sensitive to the signs the more stupid it gets, but still... wait. And when the precipitous signals turn into a precipitous day, week, you'll be ready to be decisive.
9. No one will ever tell you to sell. No one in the finance industry wants you in cash. They want you in their fund, in their product, in their system, not trading, speculating, or being active. To go to cash through a professional will require you to be assertive. You will meet resistance if you ever try to sell via a professional. Expect it. Push through it. When my Mother-in-Law rang her financial adviser in January 2008 to say "Sell'" (the seven dull managed funds he had her in), he gave her every line in the book about it being time in the market. The market then fell 44%. Get it? If you want to sell, be assertive. Or avoid professional interference altogether. (One tip is to put it in words - on email - then there is a record of you telling them to sell - when that lands, they generally sell - phone calls won't get it done).
10. Cash is always king. There is nothing wrong with cash, ever. Even if you get the timing terribly wrong all you miss is “not making money”. You can wear that. Plus cash gives you time to think. Being in cash is riskless. You have all the power. You can buy tomorrow. Do not be fearful of going to cash. It's no biggie. It's actually very cathartic, especially when things get wild. You are going from worrying about the market falling, your wealth disappearing, and your standard of living changing for the worse, to waking up hoping there's a crash! Selling is a powerful thing. It's a pressure release for the investment brain. You should try it sometimes.
11. Catching the bottom of a correction is all about sentiment. When everyone has lost faith in the market and is doing 200 miles an hour with their hair on fire, they generally also lose sight of fundamentals. That's opportunity. But you don't buy on the numbers, you buy on the sentiment changing for the better. You need to spot that and the way to do it is the same way you spot the top. On the balance of probabilities. If the market has fallen a lot, has a big up day or week, the tone of the commentary is changing for the better; on the balance of probabilities, it is a bottom. Watch the herd, don't join the herd. Fundamentals are useless when it comes to timing the market. It's why value investors can never time the market, because a PE will never tell you when to sell or buy. Sentiment watching (price watching) gives you a much better chance. 
12. At extreme moments the market drives all, sinks all boats, lifts all boats. Focus all your attention on identifying the “Pivot Point” in the market. In corrections the woods are on the move, forget the trees until the forest is going up again. It's no good saying "NAB is cheap" when the GFC is starting. When the market is crashing everything will look cheap half way through the sell down, but you don't buy falling stocks because they're cheap. That's for Buffett quoters. You can't time the market on fundamentals.
13. Stock selection comes second to the market. In a recovery stock selection is where you will make the most money, but not until you get the market right first. If you get that right you’ll make money in everything. Market first, stocks second.
14. The recovery will come fastest and hardest in the stocks that have suffered the most extreme sentiment swings. In a recovery it is not the stocks with the best fundamentals that recover the best (far from it), it is the stocks that involve the most sentiment in the price, often the stocks with no fundamentals but the most growth prospects, the stocks that people made the most money in before the top, and lost hte most money in during the correction. They rebound the earliest and they rebound the most. The money is in identifying and timing the extremes of sentiment. Spend the time in cash listing the "fad" stocks you're going to buy in the recovery. Its not NAB.
15. Corrections are great! They are to be welcomed as opportunities. Do not fear them; welcome them. They are why you sell at the top. So you can buy at the bottom. They are the best opportunities in your lifetime. The recovery from the 1987 crash, from the Tech Wreck, from the GFC, from the Pandemic. All fabulous opportunities to make accelerated gains. But you will miss them if you believe the industry Lemmings that hide in the saying "Its Time in the market not Timing the Market". "It's a weighing machine, not a voting machine" is just an excuse for giving up on timing the market. Thinking (being convinced) that it's all a long-term game is the most costly delusion any investor could live under. If you hold on through thick and thin, you're not quite getting it. The stock market is a game of making money in any price you can over any time period. It's not about "Investment" and all the glorification of Buffett and long term investment as "clever" is a brain wash that the finance industry relies on. Long term investment only works in hindsight on carefully chosen, successful, examples that are paraded endlessly ("$1000 invested in Wesfarmers in 1984 is now worth Lalala"). The long term investment mantra is sold by fund managers and financial planners trying to get you to hold on at all times, keep paying your fees, and not disturb them with expectations of timing. If everybody sold when the market peaked, the fund managers and financial planners would be out of business every ten years. Those of us who have taken control of our own investments and are timing the market, and stocks, are an Elite force of investors who are quite unique and stand outside the finance industry machine that relies on clients not thinking for themselves. Rant over?

At the end of the day, corrections are great for investors. Corrections create the market's most fabulous opportunities and you should look forward to the next great correction, not fear it.