Good morning! Well, I can really smell the fear in the market this morning, following on from a bit of a sell-off last night in the USA. People who bought fashionable, over-valued shares purely on hype & momentum are rightly being whacked the hardest. I think that's very encouraging, and healthy - this market has for too long rewarded reckless people making bad decisions, so it's excellent to see some sanity coming back into valuations.

Meanwhile the value shares in my portfolio are barely moving, some have even gone up. This just reinforces my view that it's a mug's game trying to ride momentum, because you never know when an upward move is going to end. Valuation always carries the day, in the long run. So any share that is difficult to value right now, or has a large speculative element to the valuation, is highly vulnerable to a big drop.

I'm short of five overvalued stocks, and that has proved lucrative, although it was scary standing in the way of the momentum at the time of opening the shorts. It's also been a good portfolio hedge, and has given me a larger pot of cash to deploy buying any bargains that crop up. So I've topped up on one long-term value position yesterday, and am scouring the market now for more bargains.

One of the best lessons I've learned, but which has taken over 15 years to achieve, is to take my foot off the gas when markets are frothy, and put some money on the sidelines, then just wait. Eventually the market will throw some bargains at you, but you can only buy them if you have cash on hand. Being fully invested all the time, or even worse being geared up all the time, is just a disaster waiting to happen (as I discovered in 2007-8). Markets favour the patient!

I'm not ready to buy into cut-price speculative shares yet. This feels like a proper correction to me, so I think there could well be much better buying opportunities ahead, as people panic sell, especially those on margin. Just look at how much large cap speculative shares have dropped from recent peaks - e.g. ASOS (LON:ASC) peaked at £70 a share, and is now under £44 a share, a 37% drop!

It's amazing how investor psychology can change, and rapidly.…

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