Crashing Stock Markets Can Provide Opportunity For Longer Term Gains. But Do You

Sir John Templeton was a twentieth century American-born British investor, banker and fund manager. He entered the mutual fund market and created the Templeton Growth Fund, which averaged growth over 15 percent per year for 38 years. He once said, “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude.” Warren Buffett also once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”

Easier said than done, I hear you say. How do you keep your head around you when everyone is losing theirs? Thinking contrarian has always been a great strategy and one which I have employed extensively over the years. Naturally, to be honest. Thinking differently to the crowd requires patience, discipline, and very little emotion. These are traits that sometimes have to be wired (or indeed forced) into your brain. Especially when you are losing money. Considering every asset class is down, it will pay to be less emotional, have endless patience and more discipline than ever. Testing times with investing. For all of us. Including myself. But I’ve been here before.

Way back in early 2009, and the last really terrible market in my 35 years of financial memory, the world was imploding. Through 2007-2009, what was known as the “‘financial crisis” actually began years earlier with cheap credit that fueled a housing bubble, which consequently collapsed – costing people jobs, savings, and their homes. Big institutions like Bear Stearns and Lehman Brothers, known for their risk-taking, also collapsed as they held onto large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages which people just couldn’t pay anymore and started to default on. Stock markets were getting hit.

The two-month period from January 1-February 27, 2009 represented the worst start to a year in the history of the S&P 500, with a drop of nearly 19 percent. By March 2, the Dow had dropped more than 50 percent from its October 2007 high. The decline has been compared to that of the 1929 Great Depression, which was 53 percent between September 1929 and March 1931. It was a mess.

Be Contrarian

I’ve always had a contrarian head about me. I’ve never been the mainstream and consequently I never get involved in fads or trends (sometimes to my detriment), but in March 2009, I had been watching the markets collapsing and felt that this had to end at some point. I needed a trigger and it was something out of nowhere which proved to be one. Stocks were getting cheap and I had the benefit of some smart analysts around me to help with valuations. It appeared that some of the great companies were selling for a lot lower than they were actually worth. The economy was in full-blown recession. Bankers and banks were blamed for taking big bonuses and sucking the consumer dry. The world was in turmoil. The markets had not seen anything like this since the September 11 attacks. Unemployment reached 10 percent. About 4 million Americans lost their homes to foreclosures, which were up 81 percent in 2008 and 225 percent compared to 2006. News couldn’t have been worse. The question for me was, where does this end?

I was reading Barron’s newspaper one Saturday morning in March 2009 and I opened the front page. I cannot remember specifically the title of the article, but it was a piece speaking about the turmoil in markets. The whole paper was full of bad news, in fact. I remember one distinct line that said, “…the small investor is selling.” A lightbulb went on. I knew from experience (and particularly the experience of the dot com bubble in 2000) that the small investor is always the last to get in and the last to get out. This was the opportunity I had been waiting for. I identified what I wanted to buy on my watchlist and ranked them 1-10, 1 being my highest conviction. On a separate note which we wont dig on the details, I went to the wife and asked about remortgaging the house to invest in stocks as this was an opportunity of a lifetime. I received a quick “no,” so that was the end of that. Anyway, on the following Monday, I was filling my boots with stocks that I believed were worth at least 100 percent more than what I was paying. Many of them…

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