Three Strategies — And Three Stocks — After Last Monday's Meltdown
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Editor’s Note: In Thursday’s story, I showed you how market seers are comparing last Monday’s sell-off with the Crash of ‘87, which ended up having no impact on stock prices or the U.S. economy. But I saw it as a rare “warning” — a tip to “get ready for what’s next.” Here in Part II of that story, I’ll show you how to do that for yourself.
Let’s go back to 1987, when — in spite of the Oct. 19 crash that dropped the Dow Jones Industrial Average by 22.6% — that blue-chip index ended up gaining 2% for the year.
And it ended that year at 1,939.
Since then, we’ve had two Gulf Wars, 9/11, the Dot-Com collapse, the Flash Crash, the Great Financial Crisis, the COVID-19 Pandemic, a downgrade in U.S. credit, the end of one Cold War and the start of another … and those are just some of the highlights.
At its recent record peak, the Dow reached 41,376 — meaning the index that most Americans equate with “the stock market” is up more than 21 times in the subsequent 37 years.
That’s a simple way of saying: Stocks have a long-term upward bias.
And that brings us to Wealth Builder Tip No. 1 …
Take the Long View
As I tell folks, we find the best storylines at Stock Picker’s Corner (SPC) to find the best stocks.
And once you’ve done that, with time as your ally and the power of compounding at work, the longer you own that good stock, the more money you’ll make.
Most folks know that.
But they just don’t do it.
But here’s what lots of investors don’t know: The longer you own it, the more risk you squeeze out.
Yup, that’s totally true.
Indeed, with a 10-year holding period, your odds of losing money plummet to 6%. That risk of loss is 25% for a one-year holding period and 46% if you hold for a single day (which is why you shouldn’t trade, as we’ll see in a minute).
Check this out …
Wealth Builder Tip No. 1: While I believe that last Monday was a warning … a “gift” reminding us that volatile markets are headed this way … and to be ready for them … we’ve also seen that stocks rebound from extreme events. So remind yourself to look past the whipsawing — and focus on the wealth that awaits you on the “other side.”
Wealth Builder Stock Idea No.1: Blackstone Inc. BX 2.19%↑: I’ll do you folks a “solid” right now: Our SPC Model Portfolio contains our very best ideas. Blackstone isn’t in there … yet. But when my co-founder and I met for our latest brainstorming session, Blackstone was one of our “agenda items.” We recently told you folks that — here in the Artificial Intelligence (AI) Era — Blackstone is positioning itself as “AI’s Landlord,” thanks to the massive data center strategy that it already seems to be executing superbly. Because I recommended it during my 11-year stewardship of my Private Briefing newsletter (at another financial publisher), I’ve seen that these guys flat-out know how to make money. For instance, Blackstone snapped up distressed houses during the Great Financial Crisis — and made at least $7 billion when it sold them off once real estate rebounded. Now the company is looking to package private-company investments and infrastructure plays into funds that make it easy for regular folks to invest. With more than $1 trillion in assets under management, Blackstone is the world's largest alternative asset manager. It’s nimble. It’s opportunistic. It’s smart. And earnings are projected to grow 23.5% a year for the next five years — meaning profits would double in three. And it has a decent yield of 2.6%.
That brings me to Wealth Builder Tip No. 2 for today …
When Others Panic, We Accumulate
Stocks tend to rise over the long haul.
And since some of the “best days” for stocks happen during some of the worst times (see the chart below), you can magnify your returns with my “Accumulate” strategy.
In short, create “foundational” positions in stocks you want to own long-term — and add to those stakes on pullbacks like the one we saw last Monday.
Once again, it’s all about “flipping the script.” When your emotions tell you to be afraid, take a deep breath, take a step back and ask yourself: “What’s really happening here?”
Don't obsess about “today.”
Think about what happens “after” today.
Do that and you’ll avoid the calamitous mistakes of all the other investors and traders.
And “accumulating” stocks is a key part of that “flip-the-script” mindset.
On Tuesday, after a three-day losing streak that culminated with Monday’s $1.3 trillion blistering, stocks staged a big rebound. You know why: On Monday, as retail investors panicked and sold, investment pros pounced, Bloomberg reported.
In other words, smart investment pros made money off the back of panicking retail investors.
“While newbie investors bailed, hedge funds that make both bullish and bearish [stock] wagers snapped up individual U.S. stocks at the fastest pace since March, reversing a months-long selling spree,” said Bloomberg’s Natalia Kniazhevich, citing data from Goldman Sachs Group Inc. GS 0.00%↑. A “separate JPMorgan Chase & Co. analysis showed institutional investors scooped up $14 billion of shares on net during the downdraft.”
This is what always happens — and is why individual investors, as a group, have such lousy track records.
As I say over and over: You’re either a Wealth Builder or a Wealth Killer.
And here’s part of the reason why.
Wealth Killers watch from the sidelines when stocks rally from their correction lows, bear-market bottoms or post-crash troughs. It’s only after those stocks have zoomed a long way — and those gains are hitting the headlines — that these folks find themselves infected with FOMO (fear of missing out) disease … and start to “chase” returns.
But they’ve already missed the biggest part of the profit move. And they tend to buy in near, or at, the peak — just before those stocks roll over and start to fall.
When this happens, these same Wealth Killers worsen their own wounds. Having bought near the peak, they watch their newly purchased shares drop in value. They pray for a rebound, even as the plunge accelerates. And it’s only after they’ve fallen a very long way that they finally surrender and sell — often right before the stock bottoms, consolidates, and rebounds once again.
And the whole out-of-kilter process starts itself anew. Lather. Rinse. Repeat.
They’ve magnified their losses. But they never “unlearn” this mindset. They never “flip the script.”
They certainly never would’ve snagged Southern Co. SO 0.00%↑, the high-yielding, beaten-down utility I bought just after the Crash of ‘87 — a story I recounted back in Part I of this report.
It was my first-ever foray into the stock market … and I still own some of the shares today.
I “flipped the script,” and exercised personal “extreme greed” during a period of “extreme fear” by the investing masses.
What we’re really talking about here is how investors pinball between “extreme greed” and “extreme fear.” But, unlike my Southern Co. foray, they do this at the wrong junctures.
You can actually measure this, in part, by using the CBOE Volatility Index, more commonly known as the “fear gauge” or the VIX.
At its Monday morning peak last week, the VIX reached its highest level since March 2020, when it hit 85.47 shortly after the U.S. Federal Reserve took emergency steps during the COVID-19 Pandemic, says researcher FactSet.
But check out how the S&P 500 performs during the three-, six- and 12-month stretches after the VIX rises above 35.
While we’re advocates of long-term investing, this is yet another illustration of “flipping the script” – and acting opportunistically when others are fearful.
Indeed, while VIX spikes can coincide with big sell-offs in stocks, they can be short in span and precede a nice rebound in share prices.
“You have to watch the VIX,” Tom Lee, head of research for Fundstrat, told CNBC interviewers last Monday. “When the VIX peaks and starts to roll over and fall down, the recovery can be just as quick.”
Wealth Builder Tip No. 2: What I showed you here really illustrates one point: Have a shopping list of new stocks you want to buy — and existing holdings you want to “accumulate” when stocks are falling. If you do this …. a little at a time over a longer period — even if it means buying at multiple points during a sell-off — your long-term gains will be magnified. That’s a Wealth Builder move.
Wealth Builder Stock Idea No. 2: One stock that’s super-well positioned as an “Accumulate” play is royalty streamer Natural Resource Gas Partners NRP 0.00%↑, which our friends Matt Warder (The Coal Trader) and Six Bravo (Special Situation Investing) have talked about here at SPC. NRP is a play on metallurgical coal (“Met Coal”), which is used to make steel. Matt recently said that “coal stocks are on sale,” with met coal prices currently at the bottom of their range. Even with such low coal prices, NRP just reported free cash flow (FCF) of $57 million for its second quarter. Projected over a full year, that would be almost enough to pay off the $240 million in debt NRP expects to be down to when it closes its books for the year.
NRP will probably pay this debt down over time — while it keeps rewarding shareholders with dividend payouts. The forward yield is 3.35% right now. And with met coal prices likely to rise in the quarters to come — leading to a powerful trifecta of higher cash flow, falling debt and bigger payouts — NRP looks like a solid “Accumulate” candidate.
(There’s also a “bonus” Quarterly Roundtable on NRP here for members of SPC Premium.)
That brings me to Wealth Builder Tip No. 3 for today …
Don’t Trade
Wealth Builders use the best stories to find the best individual stocks — which they buy and “Accumulate” for three, five, seven or even 10 years … or more.
Wealth Killers trade. And Wealth Builders don’t …
They don’t trade. Heck, they don’t even say (or even think) the term “stock options.”
Unless, of course, they add two words to make the phrase “Stock options are evil.”
A“DraftKings gambling” mindset has infected the financial markets. It’s kind of a cavalier, “it’s only money” dismissiveness that’s created a Whole New Generation of Wealth Killers — folks who seem to get their dopamine hits from having their pockets picked by Wall Street.
Between January 2010 and February 2021, retail investors lost $3 billion making options trades.
And zero-day options are inflicting daily damage: A study from Germany’s University of Muenster found that, since May 2022, day traders lost $358,000 each market day on zero-day options.
Even the pros get it wrong at “inflection points” in trading. Just last week, Bloomberg reported that so-called “quant funds” that chase the hottest trades got clobbered when “everything went wrong.” They wagered that stocks would keep rising, the Japanese yen would keep falling and government debt for Western economies would do poorly.
Exactly the opposite happened. The upshot: In just a few weeks, those folks gave back 50% to 75% of the gains they’d reaped this year.
For retail investors, making time your ally and avoiding such complexity is the winning move. That was true in the 1980s, and it holds true today.
Indeed, when it comes to speculation – in the words of another 1980s icon, First Lady Nancy Reagan: “Just say no.”
Wealth Builder Tip No. 3: One member of my “Platinum Rolodex” – I’m talking about a longtime friend and colleague who worked as a Wall Street sell-sider who’s more-recently moved into the dealmaking side of the business – recently affirmed my view that stock options were no better than hemlock for Main Street investors. “You’re right, Bill,” my friend and colleague told me. “The vast majority of Mom-and-Pop investors – I’m talking about 99.7% – have absolutely no business going anywhere near options of any type. For retail investors, options are a rigged game … clear and simple.”
Money tossed away on options could be put to work in some great stocks, whose returns – compounded over those long stretches – could turn into foundational wealth.
Just … don’t … do it.
Wealth Builder Stock Idea No. 3: If you really want to “flip the script” here – and make money on everyone else’s stupidity – grab shares of CBOE Global Markets Inc. CBOE 0.00%↑, an exchange and a beneficiary of all this action. Worldwide trading – options and futures – soared a stunning 64% to 137.3 billion contracts last year, says the Futures Industry Association (FIA), the trade group for the derivatives industry. Increased volatility helps the company even more. We saw that in the company’s first-quarter earnings report when it said surging market volatility boosted demand for its hedging products.
There you have it …
Three “flip the script” strategies that’ll turn you from Wealth Killer to Wealth Builder.
And three stocks you can use — starting today — to start you on that Wealth Builder journey.
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See you soon;
Check out this "short list" of stocks ...
https://stockpickerscorner.substack.com/p/watch-list-five-stocks-in-five-minutes