Rational Planning Suits the Long Term

Rational behavior reigns among successful investors. Note that the operative word here is "successful." The rational investor's retort to falling equity prices is simple enough: buy. At a minimum, the rational investor is a net buyer (making more buys than sales).

The irrational investor sells shares during periods of price weakness, presumably on the expectation that declining prices are a harbinger of problems to come. That's faulty logic for several reasons:

Share Prices Rarely Reflect Reality

Asking the market for a full and fair price quote for your shares, each and every day, is asking too much. The principal purpose of the equity market is to provide liquidity, not to accurately price shares. For example, over the last four years, Boeing's (BA - commentary - Cramer's Take) market capitalization has fluctuated between $20 billion and $60 billion. That's an outrageous swing in valuation, considering that the underlying business has not changed that much. During this period, Boeing's sales have fluctuated very little, with a weak aerospace business balanced by a strong defense business.

Offers Can Be Meaningless

It doesn't matter which asset class you're talking about, it never makes sense to accept a price for your asset simply because the offer is lower than it was last week, last month or last quarter. Long-term investors in particular should view current bids for their stocks as largely irrelevant. Once a position is taken, it doesn't matter if the bid increases or decreases.

If you own a $100,000 home, it doesn't matter if someone makes an offer of $90,000 or $110,000 in the short term. In such a scenario, you haven't lost or gained the $10,000 difference. If you are not interested in selling, if you intend on holding your $100,000 home for the long term, then an offer, be it $90,000 or $110,000, is not meaningful.

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At time of publication, Alsin and/or ACM was long BA, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, TheStreet.com Value Investor.