Big Cowards & Risky Idiots

Lessons from the Past…

In my last two posts, I put a challenge to readers: Start buying great-quality stocks. Now. I even gave you a stock to buy.

Why? Because there’s a common saying among investment professionals: “Bear markets are where millionaires are made.”

Or as the famous investor John Templeton put it, “The best opportunities come in times of maximum pessimism.”

You need to only look at the history of the stock market to really understand why:

The chart above shows the last 50 years of movements for the S&P 500, the Dow Jones Industrial Average, the Nasdaq, and the Russell 2000. The legend also shows the average annual returns for each index (not including dividends).

These are four of the biggest and most well-known indexes (or “collections of stocks”) in the world. When I am referring to the “overall stock market in the U.S.”

Take a look at places in the chart that show the lines dropping down fast. Those are bear markets (the vertical gray bars indicate economic recessions, which are different).

Here’s what I want to impart on you with this historical evidence: Each time the line trends down for months or years in any of these indexes, it gives people an opportunity to buy in at a lower price.

For long-term investors, it doesn’t much matter if you buy on the slide down, if you time the bottom perfectly, or if you only buy when stocks begin trending up again.

In each case, throughout the 100-year history of the market, many of the biggest winners in the investment markets were the people who continued buying stocks when markets were down.

This is why, last month, I introduced the concept of the Coffee Can Portfolio and the goal of picking stocks that you, ideally, never have to sell.

I bring all this up because, recently, I’ve been raising the point that investors should want to buy into stocks after bad months, before market recovery begins.

Why? Here’s why…

I Don’t Want You to Miss Out!

Whether it’s due to markets recovering or simply a “bear market rally” (a brief period during a bear market when stocks ascend quickly before dropping again), stocks tend to move up fast in a bear market.

And stocks tend to rebound from corrections and bear markets quickly and unexpectedly.

Visual Capitalist made a great chart proving this historically. The chart below shows (with the green and blue bars) how much the stock market goes up and down each year, and the red dots show how far down the market goes within each year:

As you can see, even with big drops in the market, we still see positive returns more often than not. In fact, the market ends years positively about 75% of the time.

What happened in September and October of 2022 is a good example of how this occurs.

September was an awful month for stocks, as I predicted.

But I also predicted that returns would be excellent in October.

What happened?

Stocks crashed in September…

… and then stocks soared in October.

The Dow in particular had its best single month of returns since 1976!

But those gains only went to investors who bought at the end of September… when things looked scary and unappealing.

This is one of the reasons why I and Mark Ford recommend remaining invested in the markets and, if possible, adding more to your investment accounts on a regular basis.

Now, this should go without saying, but in addition to buying discounted stocks, I want to remind you that there’s one thing you should not be doing right now… and that’s selling.

The Millionaires Don’t Sell

Selling, or staying out of the markets, can seriously affect and even destroy your potential returns.

There’s no better proof of that than this chart:

Between 1996 and 2015, Schwab looked at what market returns an investor could have achieved if they missed some of the best days in the market.

During that time period, buying and never selling through recessions and bear markets resulted in an 8.2% annual return.

But what if you missed just the 10 best days? 10 days over 20 years?

Your average return would have been cut in half, to 4.5%.

And if you missed just one month of the best gains in those 20 years? 30 days when the market did best?

Your returns would have been 0% over 20 years. Terrible!

And keep in mind, that time period spanned both the tech bubble crash (when stocks were destroyed and trended down for years) and the Great Financial Crisis of 2008 (when the entire global financial system nearly collapsed).

I lived through both those terrifying drawdowns and I know many investment professionals and former hedge fund managers who traded during those crashes.

I have two insights from those times…

The Biggest Losers Were the Biggest Cowards and Riskiest Idiots

Here’s my first insight on the current bear market and the looming recession… built on my past experience.

• There is nothing happening in the market or economy today that is remotely close to how scary things were in 2001/2002 and 2007/2008.

Nothing. Not the war in Ukraine, not hiking interest rates, not high inflation, not the threat of recession, not a Chinese financial catastrophe, not a post-pandemic “reset.”

None of the things happening now appears as terrifying as things seemed in the years between 2000 and 2010.

People forget just how bad things got.

But no matter how bad things got, even in those years, one of the best performing and easiest investing strategies was to just… buy and hold and buy more on big drawdowns!

That takes me to my second big insight:

• The people I know who lost the most or saw the worst returns are the people who either took the most risk or sold and tried to time the perfect moment to get back in the markets.

I know traders and hedge fund managers who were regularly trading over $1 billion per day in the late 1990s and lost everything, every dollar, trying to use investment systems and strategies that worked great in the 1990s bull market but didn’t work in a bear market.

Meanwhile, another former hedge fund manager I’m acquainted with, Whitney Tilson, had a phenomenally good track record during the 2001 tech bubble collapse.

What were his investments?

Companies that make auto parts and tractors and handle payment processing. Companies that serve food and make medicine. Mainly blue-chip dividend paying value stocks — not growth stocks, not tech stocks.

Remember that when economic times are tough, people pivot their investments from fast growers to safe, stable, dividend-paying blue chip stocks. (The exact same types of companies I’ve been recommending to readers in the Heritage Portfolio.)

Even in a recession, people still need to get food and medicine. People still need toiletries and healthcare, children’s and home repair goods. And they still rely on the companies that produce these things.

That’s why there’s a certain class of stocks, what I call “Heritage Stocks,” that have survived and thrived through multiple recessions. And why these companies have been able to raise their dividends for dozens of consecutive quarters.

Most of the stocks I recommend in my Heritage Portfolio look like buys right now.

So if you’re looking for investment ideas to either accumulate more wealth… or to average down your costs, I suggest starting here.