Learning to truly enjoy bear markets – to lust for them – is not easy.
Especially for novice investors, the idea of putting more money to work in bad markets makes about as much sense as running into a burning building. Nevertheless, as I'll show you today, this is an excellent way to make big gains during bear markets, while positioning your portfolio for huge profits once the bull returns.
In my career as an investment analyst, I've seen at least a half dozen bona fide bear markets. The first three occurred during the emerging-markets meltdown of 1997-1998, which began in Asia with the Thai baht devaluation.
I took a research trip to Argentina and Brazil in the summer of 1998. I spent a week in Buenos Aires and a week in Sao Paulo. Young investment bankers showed me around both cities. Three things shocked me: the motorcycle drivers, the prevalence of prostitution (I was young and naïve), and how you could buy every single stock in Brazil for less than four times earnings.
If I'd only had the capital and the conviction I have now, I would have bought every single blue-chip stock in Brazil. If only I'd put $10,000 in a dozen companies back then!
To give you an idea of how lucrative that might have been, since 2002, the iShares Brazil index fund (EWZ) has gone from $5 to $88. This fund didn't exist in 1998, but if it had, it would have traded for less than $2. I believe you would have made about 50 times your money over the years if you'd bought Brazil in 1998. That's how you turn $100,000 into $5 million.
I was there. And I could have done it – except I didn't have the capital or the confidence to believe what my brain was telling me. I won't make that mistake again, believe me...
That bear market and others taught me stock prices can fall farther than anyone can imagine and, if you're patient, it's possible to make stupendous profits in stocks, especially if you're willing to buy when no one else will. These lessons helped me begin buying stocks heavily near the exact bottom in 2002...
Stock prices had simply reached the point where we could safely buy the highest-quality stocks in America – like Exelon, which we've owned in my advisory since October 2002 issue. We bought the most efficient producer of electricity in America and the largest nuclear energy operator for 10 times earnings. You had to be dumb not to buy Exelon at that price.
But after a dozen years studying markets around the world, the one thing I know for certain is: Most people will only buy stocks when they shouldn't and will absolutely not buy stocks when they should.
If I can convince just one reader of this essay to ignore his emotions, forget his fears, and buy high-quality stocks when they're cheap – and ignore everything else – I will have accomplished something. This lesson is very important given the state of today's stock market.
With the S&P 500 down 24% from its peak to its recent trough, we are in the midst of a real bear market. My belief today is stock prices – on average – are going to go lower.
While most of your financial advisors will undoubtedly tell you to trim your exposure to stocks and "batten down the hatches" financially – you will get the opposite advice from me. Do you think Warren Buffett, Sam Zell, Marty Whitman, Bill Gross, Jim Rogers, Jeremy Grantham, Steve Leuthold, Mark Mobius, or any other extraordinarily successful long-term investor trims his portfolio during bear markets? Absolutely not. That's when they put their cash reserves to work.
Great investments are made during bear markets. Great investors earn their reputations during bear markets. The fortune you hope to gain from the markets will be made by what you do during bear markets. It's easy to buy and hold during good times. It is much, much more difficult to put money to work in critical situations when you have to go against the crowd and your own fears.
To my knowledge, there's only one way to do the right thing during these critical times: You must know how to evaluate equity values. And you must understand the margin of safety you have in your investments. Without this knowledge, it is nearly impossible to sit on your hands and hold on. If you don't have firm knowledge of the value of your stocks and confidence in their intrinsic value, you will eventually cave in to your fears. You'll join the panic – at exactly the wrong moment.
But... if you know the value of what you own and if you're confident in the "margin of safety" in your investments, you should have absolutely nothing to fear.
If you'll do this simple thing – buy value, and know that you own extremely high-quality business – you can prosper during the bear market, while you wait for the perfect moment of panic to arrive. For instance, right now, we own (and recommend buying more at current prices) Intel (INTC), one of the all-time elite global businesses.
Intel is one of only a handful of companies that has been able to grow its earnings 20% annually, for more than 20 years. Around 60% of Intel's sales come from Asia. If you believe in the growth of China and the rest of Asia, Intel might be the best way to play it. Intel plays such a critical role in the supply of silicon tools, any argument you make about Asian growth is a bullish argument for Intel. Intel's huge investments each year into research & development ensures it improves its products at a pace none of its rivals are able to match.
Do you think you'll get hurt buying Intel right now at just over 10 times cash flow? Absolutely not. This kind of certainty gives you the ability to sleep soundly during bear markets.
Right now, you're being given a fantastic opportunity to build a super-high-quality portfolio at prices that almost guarantee you'll see high average returns over the next several years. All you have to do is be selective and patient – the things most investors can't do.
Now, if you can understand why fear and bear markets are truly good for us, you'll take dire financial situations in stride... You'll know they present outstanding opportunities to build wealth for the long term.