Luke Lango believes “fortunes” will be made in today’s market … what market research suggests about 10X-winners bought in bear markets … perspective on bad investment timing

If fortunes are indeed made in bear markets, then the number of 10X opportunities should soar right after stocks crash.

This is exactly what tends to happen.

That comes from Luke Lango, writing to his Hypergrowth Investing subscribers in yesterday’s issue.

The comment isn’t a theoretical musing. It comes from a test that Luke and his team ran, counting the number of “fortune-making” stocks in any given year (defined as rising 10X in a 12-month period).

The thesis was simple:

Money is made in bull markets. But fortunes are made by those who buy the dip in bear markets…

According to the experiment, Luke found that the average number of stocks that rise 10X in any year is generally two to four. Let’s call it three, to make it easy.

Here’s Luke with what happens in the years following a market crash, specifically:

…That number grows exponentially.

Following the COVID-19 crash, the number of stocks that rose 10X soared to 25 in 2020 and 17 in 2021.

In the wake of the 2008 financial crisis, the number of stocks that rose 10X soared to 25 in 2009.

After the dot-com crash, the number of stocks that rose 10X hit six in 2002, 13 in 2003, and 10 in 2004.

In other words, our analysis suggests that the number of 10X opportunities presented in stocks tends to soar in a bear market…

Bullish signals are flashing everywhere, indicating this bear market appears to be coming to an end.

***But can cautious, nervous investors pick holes in this thesis?

Well, the data are what they are. So, in one sense, no: The numbers bear out that the quantity of 10X-returning stocks is significantly higher in the year following a market crash.

There’s more room to quibble when it comes to the “after a market crash” detail. Specifically, how do you know when the market is done crashing?

For example, back in March, the Nasdaq had fallen 22% from its prior November high. That was an official bear market.

As the Nasdaq rallied hard toward the end of March, some financial pundits said the “crash” was over. It was not.

Within a matter of weeks, the Nasdaq was trading below March’s lowest price. It continued falling hard.

More recently, in June, the Nasdaq hit roughly 34% down from its November high. That’s a healthy bear-market decline by most measures. The index has been pushing higher since, now up 7% from that low.

So, was that “the crash”? Or will hindset prove it to be just another stairstep down, similar to March’s low?

Well, here’s where we do ourselves a favor by from moving away from precision, toward probability.

***In past Digests, we’ve made the point that “waiting for the market low” is a fool’s errand

You will never know if you’ve reached “the low” in real-time.

It’s only after-the-fact that these inflection points become apparent. Unfortunately, by then, you might have missed major gains.

This is why we stress a different target in the Digest…

Buy at a price that’s discounted heavily enough to offer a high likelihood of great returns, say, three years from today.

Even if more declines are in front of you, you shouldn’t fear them. Instead, your focus should remain on a longer-term, good-entry-point price – not finding “the bottom.”

Let’s illustrate why.

***Look at the chart below, and imagine you’re watching this in real-time

As you can see, the asset has fallen hard. But it spiked down to a low, has bounced back, carved out a base, and now appears to be trying to push higher.

Thinking that the worst is behind, you buy in.

But then, what most investors fear happens…

You bought too soon. It was a false breakout and now you’re sitting on major losses.

Here’s how that played out:

 

Put a pin in this “bad timing” situation. We’ll return to it, but first, let’s move on to the “more comfortable” buying situation.

***In this hypothetical, you’re more cautious, watching and waiting

You sit through a deep-V crash, but you’re not too fast to buy in on the other side. Instead, you wait until you see the market power higher.

In fact, you wait for a test of the strength to make sure this new bullishness is genuine. What this means is, you wait for some selling pressure – then once the bulls resume command and push the price back above the resistance point, you finally buy in.

The timing turns out to be great. You ride off into the sunset with your gains.

Here’s how all of this looks:

I think most of us would be pretty happy with this timing.

Sure, we didn’t nail the bottom. But we didn’t have to sit through any major drawdowns, and we bought early enough in the recovery that there are still huge gains in front of us.

***The reality of buying at these two points in time

With the information we have, buying in the second scenario is superior to buying in the first, right?

Well, it turns out, both purchases took place at pretty much the same price. The only difference is that they’re on opposite sides of the ultimate low.

We’ve been looking at the S&P’s price-action surrounding its 2008/2009 capitulation bottom. Here’s how it looks, with a blue dotted line showing the two respective purchase-timings.

Now, if we want to get extra-specific about this particular situation, the first buy-in timing is actually better for your portfolio.

That’s because in the second buy-in, you waited for that test of strength followed by renewed bullish momentum that pushed the price above the prior resistance point. That actually put your buy-in price just slightly higher than your buy-in price before the crash.

Here’s the close-up.

***But there’s another reason why the first buy-in timing is superior that isn’t specific to this particular crash/recovery

If you’re an extra-cautious investor, there’s the risk that you’ll remain suspicious even as the market rallies after the crash. You’ll second-guess your eventual buy-in…

“I don’t like that hitch. It might mean that the recent bullish momentum is running out of juice.

Am I getting suckered in before the next leg lower? After all, how do I know that the recent low was really the bottom?

Maybe I should watch just a bit longer.”

If that cautious impulse wins out, then you remain on the sidelines. And what if the big selloff you fear never happens?

Instead, what if the market dips a bit, but then starts to grind higher? Not a roaring bull, but a wounded, staggering bull – yet one that keeps going, ever so slowly.

Months later (and perhaps double-digit returns later), you’re still on the sidelines, having missed all of this because you were waiting for one final crash that never materialized.

Today, sentiment is overwhelmingly bearish. And the idea that we’ve seen the lows of this bear market can be tough to accept.

I personally have a hard time believing we’ve bottomed-out. However, wise investors are open to all perspectives, especially those that challenge their own narratives.

On that note, veteran economist Ed Yardeni (who is Louis Navellier’s favorite economist) believes we’re already beyond the low.

On Monday, Bloomberg featured a story on Yardeni, highlighting that he believes the S&P hit its bottom last month at 3,666.77.

***So, how do you handle this market uncertainty?

I don’t know if Yardeni is correct and we’ve already passed the low. But as we’ve been stressing today, the better question is: “Have we gotten low enough?”

As I write, the Nasdaq is on sale for 28% off, based on last November’s high.

Meanwhile, countless hypergrowth tech stocks are on sale 60%, 70%, even 80% off from their 2021 highs.

Regardless of whether they’ve seen their final lows for this bear market, they’re trading at prices with a high probability of making investors great returns when looking a few years out.

Still not sure about buying today?

Good – me neither. That’s why there’s an added safety precaution we can take.

You don’t have to go “all in.”

Of a 100% allocation that you will eventually invest in a specific stock, perhaps you choose to put in just 20% today. You can invest another 20%, say, a month from now, with additional allocations to come later.

With this approach, if stocks go lower, fine – you’ll have a chunk of cash unaffected by that decline. That cash is 100% safe, and it’s available to use to buy more shares at lower prices.

On the other hand, if stocks grind higher from here without a meaningful correction, part of your wealth is climbing, too. Importantly, you avoid the regret of not benefiting at all from such gains.

You can tinker with what percentage to invest today (and the timing of when to invest later) based on your personal risk-temperament and financial situation.

But the key question for all of us is the same: “Are prices low enough today to begin nibbling on quality stocks that have seen major drawdowns?”

On that note, here’s Luke with the final word:

About once every 10 years, a bear market emerges. Stocks get crushed. Investors get spooked. Everyone runs for the hills. And they wait for things to get better.

But perspective is everything.

We like bear markets – because this is our perspective:

Bear markets allow us to buy amazing companies with huge potential at compelling discounts.

We get excited. We run toward stocks. And we score 10X returns over the following year as the markets rebound.

Fortunes are made in bear markets – but only by those who recognize and capitalize on the fortune-making potential.

Are you one of those people?

Have a good evening,

Jeff Remsburg