With my feet firmly planted on a nice sunny beach, I knew I never should have answered the phone.
Even after attempting to ignore the third ring, I wasn’t smart enough to just turn it off.
I answered the call, and on the other line was a good but panicky friend who, for obvious reasons, shall remain nameless. Of course, he didn’t call me to talk about the size of the surf…
With the markets in yet another 600-point free fall, catching some waves was the last thing on his mind.
“Dude,” he said in a higher-than-normal pitch, “I just dumped everything. This market is insane.”
With that, I started laughing. I couldn’t help myself — and not because I wanted to see my pal lose money…
But because I figured his frantic call meant the bottom was near.
Fear: Your Own Worst Enemy
For the majority of retail investors, fears — both real and imagined — are their own worst enemy.
For my friend in particular, the funny shapes he has perceived in his closet from time to time have been no less than disastrous for his portfolio.
When it comes to making predictions about the end of the world, he’s a guy who makes the Jehovah’s Witnesses look optimistic by comparison (which makes me wonder why he buys stocks in the first place).
The truth is if he were to bundle up all of his pessimism, and was willing to consider this against long-term outlook, his constant drumbeat would add up to one thing: pure hysteria.
Despite all the calls for the Apocalypse, what I’ve learned is that the sun actually does comes up the next day.
Admittedly, this doesn’t make the events of last week any easier to stomach.
On the day of my friend’s call, every single stock in the S&P 500 dropped, and the 635-point free fall in the Dow Jones Industrial Average was its sixth largest point-drop ever.
Before it all ended, the market fell a full 17%, wiping out almost $7 trillion in market value, according to Bloomberg News. Everybody, it seemed, suddenly wanted out — no matter the price — as cash became king.
And my friend had plenty of company as he headed for the exits.
Now, I find one glaring thing wrong with that whole strategy: The return on investment for all of that cash is a big fat zero. Zilch. Nada. Nothing.
And isn’t that what investing is all about? Wealth creation actually involves owning something rather than owning nothing; there is no substitute. Risks or not, that’s how it works.
Investors are called to understand that the long-term trend is always higher. As I pointed out in an earlier article, when I graduated from high school in 1981, the DOW was 850. In 1931, it was a mere 96 points. When I was born, it was 578. Today it’s 11,385.
The point is, while there are declines and long periods of consolidation, history tells us it’s only temporary.
The bull market will return. And when it does, Dow 11,385 will be left in the dust…
Time to Go Bargain Hunting
The day after my phone rang, I began to bargain shop. Because when fear is running as rampant as it has been, the market opens up to new opportunities as everyone else throws in the towel.
Unlike my frantic friend, I love it when stocks go on sale.
You see, unlike most investors, I know that fear and capitulation go hand in hand. When all seemed lost and the VIX was screaming higher, instead of heading for the exits, I began to wade in…
And lo and behold, that afternoon, the Fed stepped in and said it may keep interest rates low through mid-2013, and was “prepared to employ” additional tools to bolster the weak economy. With that, the plunge had basically run its course in the short term.
The good news is that even with the current upswing, there are still bargains on the rack…
Energy and materials stocks are still high up on my list. For those of you who prefer exchange traded funds, I like the Energy Select Sector SPDR (NYSE: XLE) and the Materials Select Sector SPDR (NYSE: XLB) as ETFs to buy on weakness here. And I’ll tell you why…
Despite the doom and gloom, corporate profits are still growing, with 90% of the S&P reporting earnings.
Earnings grew 11.7% over the same period last year, as three out of four companies beat analysts’ estimates. What’s more, earnings are expected to grow 16.4% in Q3 and 18% in Q4.
That’s bullish, not bearish — which is why energy and materials stocks will rebound from here.
Another company to consider is a two-fold play Nick Hodge recently brought to my attention. It’s a company with a cutting-edge process that Nick says will not only revolutionize nuclear power plants, but will also deliver one-of-a-kind advanced materials.
So forget the fear. All is not lost.
As every contrarian investor knows, it’s times like these that deliver the next big winners.
How can you buy low and sell high if you’re not willing to go against the crowd sometimes, dude?
Your bargain-hunting analyst,
Editor, Wealth Daily