This Is The Time To Get Rich
“F.E.A.R. has two meanings—Forget Everything And Run, or, Face Everything And Rise. The choice is yours.”
I love this quote so much.
It applies to almost every challenge we face in life.
Including the one investors face right now.
There aren’t many who would dare to buy stocks at this point.
I can understand why. The stock market is in decline, the number of coronavirus cases is rising, and most of the daily news we receive is extremely negative.
However, while most investors have backed away, some are buying in this environment.
And they’re not some crazy maniacs either. I’m talking about some of the smartest financial professionals in the world.
Industry giants like Howard Marks, Kyle Bass, and Mark Cuban.
They know that billions are to be made in times like these.
In fact, in the last forty years, a crash like the one we’re experiencing now happened only three times.
And each time, the market rallied afterward.
Lessons From History
The first such crash was actually a combination of two, the first one in 1981, and the second one in 1982.
They happened after the Fed Chairman Paul Volcker raised interest rates to 20% to curb in the runaway inflation.
His move froze up the economy and collapsed the financial markets. From peak to top, the S&P 500 declined by 33%.
At the time, the newspapers labeled it the worst crash since the Great Depression.
However, nine months later, the stock market was up 52%, erasing all the losses of the past two and a half years.
The crisis, dark as it seemed, proved to be a tremendous buying opportunity.
Fast forward a few years to the dreadful October 1987, and investors were once again facing another scary situation.
During the Black Monday crisis, the S&P 500 declined by 31%.
“Does 1987 Equal 1929?”; “Billions Lost In Trading”; and “Panic” read the newspapers.
Twenty-one months later, however, the index was up by 41%.
Investors would then have to wait more than twenty long years for another such opportunity to arise.
When it finally came in 2008, it was touted as the worst crisis in 80 years.
And it was. Peak to bottom, the S&P 500 declined by 53%.
Nonetheless, that didn’t stop it from rising by 70% in the 10 months that followed.
As you can see, there is an underlying pattern repeating itself through past crises.
When everyone else is panicking, you should face the fears, and buy stocks.
And with the market down by 30%, this is the time to do it.
Of course, I don’t mean you should just buy any stock. Some companies will navigate this crisis better than others.
Coronavirus Investing Criteria
The first and most important criterion to consider is the state of a company’s balance sheets.
Over the last two years, I have been warning investors about the elevated levels of corporate debt and the danger this presents.
Let’s just say that the chickens have come home to roost.
Companies that let their debt run out of hand will face severe difficulties in the coming months. Some will default, though most will secure enough additional funding to prevent that scenario. Still, even if bailed out, the negative impact on their share prices will last well into the next economic expansion, so you want to avoid those.
On the other hand, businesses with strong balance sheets and, in particular, with large cash positions, will bridge this revenue gap with ease.
Moreover, the ample amount of cash will allow them to aggressively re-enter the market and consolidate their market share once we exit the recession.
Which brings me to the second criterion—market share.
In times like these, it’s safer to stick with companies with established business channels, rather than betting on upcoming players.
New market entrants typically invest all their cash flow in expansion and rely on outside funding to cover their liabilities. This is a viable strategy 90% of the time. Unfortunately, though, it utterly fails during a recession, since there’s not enough money to service the ongoing liabilities.
Furthermore, established companies have higher credit scores, meaning they can borrow cheaper. This access to capital, which they can invest in their business, gives them another competitive advantage going forward.
The final criterion to look for is excellent long-term growth projections. This is really something you should look at in any economic environment.
However, the reason why I’m stipulating it is because the recent price declines might tempt you to reach for companies with dubious long-term potential just because they’re trading so cheap.
The easiest way to separate the two is to favor the stocks that were making gains over the last two years, and avoid those that were already in decline before this crisis.
While several companies meet these criteria, I’ve identified two that I believe have the greatest upside potential in 2020.
I talk about them in the latest issue of my True Retirement Wealth, which will be in subscribers’ in-boxes next Tuesday.
You can get on board here now in time to receive your copy of my current recommendations hot off the virtual press.
Good investing,
Leon Wilfan