Contributed by: Keith Fitz-Gerald (http://moneymorning.com) -
By Keith Fitz-Gerald
Money Morning/The Money Map Report
The Dow Jones Industrial Average
is already in the bear’s grasp. And the U.S. economy may well be headed for a recession. But here’s the ultimate irony: Bear-market investing offers a direct pathway to the biggest profit opportunities most investors will ever see.
History shows time and again that the worst
returns come to those who buy at - or even near - market peaks, like those of 1928, 1969, 1999 and 2007, when Price/Earnings (P/E) ratios are typically higher than “normal.”
Conversely, investors who buy when the days are darkest reap
the best returns: Think 1932, 1942, 1982, 2003 and - take a deep breath - possibly 2008.
Clearly, at a point when the world looks like it’s going to hell in a hand basket
, sitting on the sidelines in cash would appear to be the easiest and safest strategy to adopt. But there’s one major problem with that kind bear-market investing strategy.
That “safety” is an illusion. And the strategy doesn’t work.
Spectators Are a Bear Market’s Biggest Losers
You see, you can’t score if you don’t play. And if your bear-market
investing strategy is to sit on the sidelines during volatile stretches, the odds are good that you’ll end up as a mere spectator when stock prices rebound, meaning you’ll miss out on the big updraft that generates the long-term profits we seek.
The so-called “smart money” understands that many investors panic and race for the exits during bear markets. The shrewdest investors already are positioning themselves for the next round of stock-market profits - even though those profits may not appear for some time.
That’s why it’s best to stick with a long-term, battle-proven strategy - like the one that we advocate here at Money Morning,
as well as within the pages of our premium monthly newsletter, The Money Map Report
. This approach to bear-market investing enables you to stay invested alongside the smart-money crowd. That’s really not a surprise, given that they’re concentrating on the same investments that we’re outlining for you - including companies that focus on such key global plays as energy, natural resources and worldwide infrastructure.
Not only are many of these “Global Titans” increasing earnings despite miserable market conditions, they’re actually building market share and focusing on powerful trends that will take decades to play out and that will generate trillions of dollars in profits along the way.
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After all, the global markets truly reward the companies that make the world “go ‘round’.”
The Five Keys to Bear Market Profits
Now that we’re in the midst of a new bear market
, here are the five secrets that will pave the way to bear-market profits:
- Don’t Try to Catch a Falling Knife: The first bad news is never the last, as so many investors found out when the Internet bubble imploded in 2000, quickly eradicating $14 trillion of wealth. If the fundamentals don’t match up with the stock’s price, don’t buy.
- Don’t Overpay: One of the biggest miscues bear-market investors make is in concluding that certain stocks are a bargain simply because they’ve traded down to historic lows. It’s better to consider “tangible book value.” The reason: Tangible book value represents what a shareholder can actually expect to receive if a company turns turtle; it’s a good measure of what the firm’s real assets are worth. So, at a time when earnings are decelerating - or have vanished completely - buying companies that are trading below tangible book value can provide an extra measure of downside protection, especially when you’re talking about a company that’s perfectly positioned to capitalize on powerful global trends.
- Look For Pricing Power: When the going gets tough, the tough… stop buying. At least, they stop buying the stuff they want, and shift, instead, to the stuff they need. This has a major ripple effect in the economy. Many businesses are forced to go on the offensive to keep the customers they have, or to “win” new ones - at a time when consumers are loathe to spend. This suggests that companies that are able to continue, or even ramp up, their advertising spending make the best bets. Especially alluring are companies that can keep their customers - and even raise prices - in the face of a bull market.
- Watch for the “New Research Coverage Initiated” Signal: Although Wall Street hates to admit it, analyst ratings and recommendations aren’t intended for us individual investors. At least, that’s been the case historically. Investment banks actually use their company “coverage” to generate investment-banking deals and to cozy up to the senior executives of the firms that are being “analyzed.” Since analysts often have access to insiders long before they publish their “reports,” new coverage can signal positive future growth or expansion plans.
- Drill for Dividends: Many investors focus on so-called “growth stocks” in their rush for riches, when study after study demonstrates that dividend-yielding stocks can offer as much as a 25-1 advantage. One study by Ned Davis Research is particularly telling, noting that dividend-paying stocks provided returns of more than 10% a year from 1972 to 2005. Non-dividend paying stocks, in contrast, posted gains of just 4.1%. Given that this research study started at the worst possible time in the past 40 years - just prior to the “bear market” of 1973-1974, which dragged on for 21 months and caused shares to lose 48.2% of their value - these numbers are especially noteworthy.
Follow this playbook, and you won’t have to remain a spectator during lousy markets. You’ll be out on the playing field - and you’ll beat the bear.
|About Keith Fitz-Gerald (http://moneymorning.com)
Keith Fitz-Gerald is a Contributing Editor to Money Morning, as well as Investment Director of the Money Map Report and editor of the New China Trader. He is also a seasoned market analyst known for his accuracy, perspective and insight. He is also a former professional trader and licensed CTA advising institutions and qualified individuals, and he specializes in non-directional trading.
Fitz-Gerald started his first business and began investing the proceeds at age 15, but he officially launched his business career 19 years ago when he joined Wilshire Associates, the globally recognized financial consulting firm. He is currently Founder and Managing Member of Fitz-Gerald Research Publications LLC, an investment-research firm that publishes general investment research, commentary and analysis.
Having discovered key financial relationships that allow the markets to be modeled using complex systems based on Chaos Theory, Fitz-Gerald has been recognized as both a true pioneer of the form and an expert at using non-linear theory for market prediction, risk management and portfolio construction. That makes him one of the few people in the world who works exclusively with non-linear theory to predict the markets and forecast economic and financial events.
With his cutting-edge analysis strategies, Fitz-Gerald has actually called some of the key market events in recent history. When crude oil was trading at less than $20 a barrel, Fitz-Gerald predicted it would rocket to $50, $60 and even $70 a barrel - the record levels that crude oil has reached today. He was one of the only analysts who correctly predicted both the 2000 stock-market decline and its subsequent turnaround in 2003. In February 2007, during an appearance at the World Money Show in Orlando, he publicly predicted that China’s shares were in for a tumble: He notified his subscribers of his prediction a full four days before that country’s stock market plunged 9% in a single trading session. And most recently, in speeches and detailed articles that preceded the actual event by several months, Fitz-Gerald repeatedly warned of the credit crisis that’s only now roiling the global financial markets.
He was recently named a founding member of The Kenos Circle, a Vienna, Austria-based think-tank that identifies long-term economic and financial trends using the Science of Complexity, which is better known as “Chaos Theory.”
Fitz-Gerald holds a BS in Management and Finance from Skidmore College and an MS in International Finance - with a focus on Japanese Business Science - from Chaminade University. He and his family split their time between Portland, Oregon and Kyoto Japan.