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TheStreet Open House

The Correct View of Corrections: Opinion

NEW YORK (TheStreet) -- Relief rallies feel pretty good, don't they? That's what the past four trading sessions have been. We are still a couple of percentage points below the recent peak but it feels like investors are breathing a collective sigh of relief that last month's correction never technically became a correction.

You call that a correction?

Up to a 10% decline can be called something like a pullback or a dip, but not a correction. A correction occurs whenever the stock market drops by 10% or more. When we get to a 20% decline, peak to trough, we are now in a "bear market." Is this information helpful at all? The answer is, "Not really." 

Were we in a bull market at the end of 2008? Nope -- to invest at that point would have been no different than flushing your money down the toilet. You would have been investing during a bear market! Anybody who has passed the Series 7 knows that is a bad idea. Yet, in hindsight it would have been one of the smartest things you could have done.

So we want to buy low and sell high, but the media would have you believe that we rarely want to buy during a correction, and absolutely never buy during a bear market. Make sense? Why is it so easy to buy a shirt or a box of cereal when it's clearly marked "sale" but so difficult when it's the stock of a company you'd like to own?

In reality, the best times to buy are during bear markets and the best times to sell are during bull markets. Trouble is, you can look and feel quite foolish doing the right thing. Keep in mind that there will be an element of "wrong" in every single one of your investment decisions -- you will never buy at the absolute bottom and never sell at the absolute top. Come to terms with that, accept that this is not an exact science.

One definition of the word "correction" is "punishment intended to rehabilitate or improve." Of course, this is not the definition pertaining to a stock market correction, but I find the inclusion of the word "improve" interesting.

The efficient market hypothesis tells us that the market is perfectly efficient -- that every security is priced exactly as it should be priced, given all publicly available information at any given moment. The market does not anticipate, it reacts, and as a result prices move -- sometimes dramatically.

A correction can be viewed as the market being punished so it can improve. I think this concept applies to each of us investors as well.

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