“Be Greedy When Others Are Fearful”

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Seeing opportunity when most are in despair

Warren Commands You…

This article has been on my mind for quite a while now, and only recently have market conditions gotten to a point where I feel it’s worth writing about. In the next little bit, I’m going to lay out why I think the stock market is priming itself for big opportunity, and I’m going to discuss how I’m planning on playing it.

Some Background:
I have a small group chat of a couple friends where we talk about a bunch of nonsense almost daily, but this is also where I bounce investing ideas around. For the last year and a half or so I’ve been telling the guys that I’m saving cash for the next stock market crash. You see, a broad stock market crash presents big opportunity for those that have money outside of the market when it happens. During the COVID meltdown I was able to pile in something like $30,000-$35,000 and since then I’ve averaged about a 60% return on those investments plus dividends. My biggest regret is not investing more. Since then, the market has run up quite aggressively and for a while I was pretty happy with that. Everyone was. It seemed like there were stories all the time of random people who were “the next Warren Buffet”. This is because we entered the late stages of what is known as a “bull market”. This is a period of stock market growth where most quality stocks tend to go up and few quality stocks go down. In the good times, it’s easy to look like Warren Buffet. What sets these legends aside is what they do during the bad times. As time went on, I started to become suspicious of this bull market. How could stocks be doing so well when the world was locked down, the supply chain was struggling, and people were out of work?

That’s when I started connecting a few dots. Stocks were going up because governments around the world were printing money hand over fist, and many of them were giving that money out free of charge. Interest rates were plummeting making money cheap which lead to increased spending and investment that was artificial — it couldn’t go on forever. Then I started to look into what might be coming in the near future. The more I researched, the more obvious it became that heavy inflation was coming. With inflation comes less spending which would hurt many companies’ bottom lines which in turn would hurt the stock. Many of the big tech companies that had done so well through COVID would have a significant drop in demand for their services once the world opened up again. The cracks were forming.

I’ve been saying the stock market was going to crash for a while now, but I’m not some kind of prophet. If you say that long enough, eventually you’ll be right.

The Meltdown

S&P 500 Year to Date

Ok, maybe meltdown isn’t the right word, not yet anyway. But we have seen a significant pullback in the market. What you’re looking at is the S&P 500, which is essentially a collection of 500 of the biggest companies listed on American stock exchanges. It’s a very good benchmark of how the overall stock market is doing. As you can see, since January this has dropped 14% so far. For reference, some other major drops that have happened are about a 30% drop from COVID, 40% drop in the 2008 mortgage crisis, and about 40% following the internet bubble burst in the early 2000’s. I expect the drawdown to continue over the coming weeks because the things I believe to be route causes of the drop have not been resolved. Inflation is still rampant, the free money that artificially inflated the stock market has mostly stopped, supply chains are still affected, and there is global uncertainty with the current crisis in Ukraine. There are many other factors, but that’s for another article.

S&P 500 “all-time” chart

Although I’ve said that there can be big opportunities in a market drawdown, you have to be careful when investing in a falling market. You could pile in all your money today and lose another 14% in the coming weeks. Nobody knows how low this could go, and although I expect the drop to be somewhat nearing its bottom, I wouldn’t necessarily be surprised to see us drop to catastrophic lows.

The Play

I personally have been sitting on a pile of cash that I’ve been waiting to put into the market. I’m not quite there yet, but I’m nearing the point where I will start to invest my money. When I start to buy into the market, I will focus on quality stocks with strong balance sheets that pay well-covered dividends. What I mean by that is I will buy companies that make a lot of money, regardless of what the stock market is doing and that pay me a paycheck to hold their stock. My reason for this is because I have no idea how long this market downturn can last, and in the case that it lasts a couple of years I don’t want to just watch my investment drop in value for that long. If the stocks I purchase will pay me out a dividend while I wait for markets to recover, it will be much easier to sit on it for as long as it takes to recover.

Monthly Dividend Payment from RioCan

When buying stocks, I like to scale in to my positions. What I mean by that is if I have $10,000 to invest in a stock, I won’t just buy $10,000 worth of it in one shot. I will spend maybe $1,000–$2,000 and wait to see what the market does for a few days or weeks, then if it continues to drop I’ll add a bit more. By doing this I can average down my positions as much as possible to get better bang for my buck. If the market rebounds and goes up before I’m totally scaled in, that’s ok too because then I’m making money. It’s also not the end of the world if I buy the stock on the way back up.

If I buy on the way down or on the way back up, in theory I have at least 2 shots at paying the same price for the stock.

Here comes the un-sexy part of the plan. I won’t invest in tech stocks like Tesla, Netflix, Amazon, Shopify, or Google, nor will I invest in Crypto, NFT’s, or meme stocks. None of these things pay adequate dividends which is a key part of my plan, and most of these have traded on speculation and not rock-solid fundamentals (they don’t make enough money to support their valuations). Also, I’m investing through a TFSA and trying to legally avoid all taxes, so I’m going to be buying Canadian companies so my dividends don’t get taxed.

Here’s some examples of the companies I will be researching and possibly buying:
CU, FTS.TO, ACO-X.TO, ENB.TO, PPL, TRP.TO, RY.TO, BMO.TO, BNS.TO, POW.TO, FN.TO, GWO.TO, T.TO, BCE, CPX.TO, AQN.TO, TCL-A.TO, CSH-UN.TO, ARE.TO, CRT.UN, SRU.UN, HR.UN, EQB.
(You can google these tickers to see exactly what company they are)

What YOU Should Consider

Everybody should have investments. It’s important to plan for the future, but it’s also important to do it right. You can seriously set yourself back if you invest in the wrong things at the wrong time. Here are some things to consider before investing:

-Do you have enough money AND income outside of investments to cover your living expenses? (Your answer better be yes)
-Do you have debt at high-interest rates (3%–4% or more) on non-appreciating assets? (Your answer better be no)
-Can you afford to sit on your investment for 10 years? 20 years? 30 years? (the longer you can sit on it, the safer it becomes)
-Are you investing in something safe? (your best bet is diversity. Buy index funds if you don’t know what you’re doing)

Before throwing your hard-earned money into the market, make sure you have a plan and you know what you’re getting yourself into. For most people the best way to invest is by buying index funds (a collection of a bunch of stocks) or by using a Robo-investor such as Wealthsimple Invest. I would highly recommend you build a strong foundation in money and personal finance before dabbling in the world of investing. Luckily for you, I’ve built a course that does just that!

https://moneybasics.thinkific.com/

https://moneybasics.thinkific.com/

The course teaches you about money from the very beginning, where school probably should have started teaching you when you were 14 years old, and leaves you with a basic understanding of how and when to get started on investing. The course takes about 15 hours to complete, so I would recommend you get started soon so you’ll be ready to take advantage of the ongoing stock market crash.