|
Regular Digest readers are very familiar with our CEO, Brian Hunt. That’s because, beyond helming InvestorPlace, Brian is an accomplished teacher of investing, having penned many essays we’ve featured here in the Digest, as well as in our InvestorPlace Education Center. Yesterday, Brian sent an educational email to InvestorPlace employees that I found powerful. You see, working in the investment business, many InvestorPlace employees recognize that, despite the inherent scariness of this market crash, it’s setting up amazing buying opportunities. Given this, lots of my coworkers have been wondering about the best way to take advantage. To shed some light on this, Brian sent out some thoughts yesterday. I found it such a helpful piece of investment wisdom that I asked Brian if we could feature it in the Digest for everyone’s benefit, and he graciously agreed. Bottom line — we will get through this. Markets will climb again. And below is your roadmap for taking advantage of it. I’ll let Brian take it from here. Jeff Remsburg |
How to “Drip, Drip, Drip” Your Way Through This
Hi folks,
At some point in the past few weeks, you may have asked yourself if it’s time to heed Warren Buffet’s advice to be “greedy when others are fearful” and start buying cheap stocks.
At some point, these key facts might have come to mind:
***Stocks have climbed an average of 6.5% per year (after inflation) per for over 100 years … through panics, world wars, and recessions.
***From 1928 to 2019, we had 25 bear markets. After each one, stocks went on to hit new all-time highs. The stock market’s record of recovering after tough times is perfect.
In other words, it pays to bet on America. It pays to bet on human grit and ingenuity.
With all this in mind — plus the fact that the market values of many high-quality companies have declined 33% to 66% — the next thing we need to discuss is how to put money to work in this environment.
How can we act on Warren Buffet’s advice to be “greedy when others are fearful”?
I believe the best strategy here is something you could call “drip, drip, drip” buying.
Before I get into the details behind the “drip, drip, drip” buying strategy, let’s quickly discuss “V-shaped” recoveries and “U-shaped” recoveries.
In late 2018, the stock market fell nearly 20% from its highs and posted one of its worst monthly declines ever. The market fell so far so fast because investors were worried about a global economic slowdown and a U.S.-China trade war.
However, after hitting a low on December 24, 2018, trade-war worries eased and stocks soared in what we call a “V-shaped” recovery. You can see why we call it a V-shaped recovery in the chart below. It shows the late 2018 decline and the fast rebound that followed.
I think it’s highly unlikely the current situation will be resolved in a V-shaped recovery like the one you see above.
This is because the corona containment response has caused a great deal of damage to the global economy. It will continue to cause damage to the global economy.
The recovery from the December 2018 crash was so strong and so fast because the underlying cause (trade-war worries) wasn’t “high impact.” It didn’t cause people to shut down factories and stores and conventions and restaurants.
Although the stock market crashed in late 2018, commerce continued. People went about their daily lives. They shopped, went to work, went out, traveled, etc.
Because the corona containment response has caused so much economic damage and will continue to cause damage, I believe we will see a “U-shaped” recovery. We aren’t springing back to January levels of economic activity anytime soon. We’re in for a slog. Stocks will go sideways-to-moderately lower for months.
I hope that I’m wrong. But I’m confident that I’m right.
Importantly, I believe the bottom part of the “U” will be very jagged. This is a way of saying stocks will be very volatile as we work through the damage caused by the containment response. We will see more than a handful of days where stocks are up or down 4% to 8%. I think we are looking at two to six months of sideways, choppy action while the world works through the economic damage.
I think we’ll get something that looks like a raggedy, ugly U … like we got in the wake of the Great Financial Crisis of 2007-’09. Here it is:
The economic damage we’ve suffered and will suffer will take months to work through. We are looking at a multi-month market bottoming and recovery process.
As a result, I believe there is NO RUSH to put your spare cash to work all at once.
There is need to buy your “post panic” positions in one shot.
Instead, I recommend you employ a “drip, drip, drip” buying strategy.
This strategy is extremely simple, and I believe it will prove to be extremely effective over the coming year. Here’s how it works …
Drip, Drip, Drip
Let’s say you have $100,000 to buy up bargains the panic has created. You see tremendous values in tech, travel, media, retail, energy, and healthcare stocks.
You want to follow Warren Buffet’s advice to be greedy when others are fearful.
Congratulations. You’re keeping your head while others are losing theirs.
But keep in mind, trying to time your buys to hit the exact bottom is a sucker’s game. Nobody can do it. Nobody.
Instead of trying “time the bottom” and put all your money to work at the exact panic lows, I encourage you “chop up” your money into pieces and look to put one piece per week into the market over the next four or so months. That’s 16 pieces.
Gradually drip your money into the market. Buy a little every week or so.
Drip, drip, drip.
Just like the coffee makers of the past worked.
If you put your money to work this way, you will not put all your money to work at the bottom. You won’t get in at the exact lows. But you also won’t put all your money to work right before the market drops 8% in a day, putting you in the hole immediately.
Instead, you’ll gradually buy in pieces.
You’ll buy some of your total position near the exact lows.
You’ll buy some of your total position right before the market drops 8% in a day.
You’ll buy some near the average prices of the bottom. You’ll get a good “blended” average of the U’s prices.
To be clear, there is no scientific formula behind my recommendation of buying “once per week for four months.”
It’s just a reasonable “middle of the road” strategy.
You can buy every two weeks. You can spread your buying over five months instead of four months. If you’re bullish and think the turnaround will arrive faster than most people expect, you can buy over a period of just two months.
If you put half of your money to work over a few months and then see that a quicker recovery looks likely, you can go ahead on put the other half to work at a much faster pace.
Don’t get caught up in the fine details. Just get the general strategy right and you’ll be fine. But don’t play the sucker’s game of trying to buy your full position right at the exact lows.
Instead, drip, drip, drip your capital into the market … accumulate bargains over a period of months and “average out” your entry prices.
This is just one guy’s take. One guy who knows that it pays to bet on America and the world overcoming this crisis and going on to hit all-time highs.
Regards,
Brian
