When I was a kid, I first learned that some of my childhood friends received $10 for each “A” on their report cards. A few even got $5 for a “B.” This was like finding the Holy Grail. No more begging for video games every Christmas. I was going to be rich.
I rushed home and told my dad about this wonderful discovery. My high hopes lasted about three seconds. “Son, the reason you don’t get a reward for getting A’s is because that’s the expectation, not the goal.”
I was disappointed, as any kid would be. But, in hindsight, it was a good lesson.
I spent most of my professional career as an institutional due diligence officer, and things weren’t much different. I had the responsibility of over 10,000 financial advisors – and their clients – on my shoulders. My team oversaw which investments made the cut, and which didn’t. It included everything from private equity in Asia to energy infrastructure in the Middle East. There were no bonuses if things went to plan. That was the expectation. But there were serious consequences if they didn’t. Not much different than my report card now that I think about it…
Due diligence officers only last if they make decisions based on business fundamentals, financial reports, and sound research. Guys in my field never claim a single investing strategy is the “best.” But that’s exactly what I’m doing today in this edition of the Wide Moat Daily.
Profiting From Panic Is Timeless
The Panic of 1907 is a critical event in U.S. history. Yet many have never heard of it.
To make a long story short, a group of traders had attempted to corner the market for shares in the United Copper Company. Some banks lent huge sums to the traders. Others were using United Copper Company stock as collateral. When the traders failed, everything went south for the traders and banks. The contagion caused several banks to fail instantly and a run on others.
Banks collapsed. Loan defaults skyrocketed. The New York Stock Exchange fell by 50%.
As chaos swept through the U.S. banking system, J.P. Morgan waited… and waited… and waited.
Then, when it seemed like no hope was left, he went all in. Using his own money and that of his powerful allies, he stepped in and bailed out the surviving Wall Street banks. But how did he get the money in the first place? The answer is by aggressively buying assets during the Panic of 1873 and Panic of 1893.
Giving debt relief to people that really need it, that’s what foreclosure is.
– J.P. Morgan
Paul Getty was born in 1892 and inherited $500,000 in 1930, or about $9.5 million adjusted for inflation. A lot of people would find a beach at that point and retire. But not Getty.
He understood that oil companies had a bright future. And that the infamous Wall Street crash of 1929 had sent his favorite oil stocks to the bottom of the barrel. He bought feverishly, risking his entire fortune at 38 years old. When the market recovered, he’d turned his $9.5 million inheritance into over $1 billion, inflation-adjusted.
I buy when other people are selling.
– J. Paul Getty
John Paulson was born in 1955 and founded his company in 1994. Prior to 2007, he was unknown. But like the others on this list, Paulson’s long hours of research paid off when the stock market began to falter. He put all his chips on the table and took massive positions during the Great Recession. Today, he’s a household name on Wall Street and is worth $11.4 billion.
Fear-driven periods in the past have been used as buying opportunities for savvy investors.
– John Paulson
From 2008 through 2011, during the heart of the Great Recession, Warren Buffett’s Berkshire Hathaway made strategic investments in Goldman Sachs, Dow Chemical, and several others. These are deals that would never have been possible during normal times.
When Goldman Sachs was teeter-tottering after Lehman Brothers collapsed, Buffett saw blood in the water. He negotiated a $5 billion purchase of Goldman Sachs preferred stock to boost Goldman’s balance sheet. Thanks to the panic, Buffet secured another $5 billion in warrants as part of the deal. Buffett’s buying spree during the Great Recession netted over $10 billion in profits.
Be fearful when others are greedy, and greedy when others are fearful.
– Warren Buffett
It Boils Down to One Simple Concept
You and I aren’t going to make any sweetheart deals with Goldman Sachs like Warren Buffett. Or partner with Andrew Carnegie to cement our dominance in the banking system like J.P. Morgan. And we don’t need to.
Markets are still dominated by humans, not computers. Don’t believe anyone that tells you otherwise.
I worked at a hedge fund for years and later did due diligence on most of the top firms (e.g. Renaissance Technologies and Millennium). Computers and AI play a big role, but humans are still in the driver’s seat. As long as that remains true, there will be crazy, fear-driven market sell-offs just like we have been experiencing lately.
But to take advantage of a stock market correction or crash, you need a plan. Most people’s instincts take them in one of two directions. The first is the worst. They join the panic and sell their holdings at depressed prices. A few clicks like that can derail 40 years of saving for retirement. I saw it happen during the Great Recession.
The other is to freeze and stare hopelessly as everything in your portfolio turns redder and redder. Compared to selling at the bottom, freezing is a great strategy, but not the best.
J.P. Morgan, J. Paul Getty, John Paulson, and Warren Buffett all took different roads to riches. But they all began by investing aggressively during market downturns. After all, that’s when things go on sale. That’s when the margin of safety is the greatest. Don’t let perfection get in the way of buying when the time is right.
It doesn’t matter if you buy banks like J.P. Morgan or energy like J. Paul Getty. Just be familiar enough with the companies that you know most will survive the downturn. Like the kind of quality companies we focus on here at Wide Moat Research.
Many of our portfolio companies have paid dividends for decades without skipping a beat. Personally, and in the two services I manage for subscribers, I diversify investments across industrials, financials, consumer staples, energy, and real estate, to give a few examples. I also leverage my experience with overseas markets by selecting companies with exposure to high-growth areas internationally, which also enhances diversification.
Make a List… and Have It Handy
Even though it’s not your full-time job like mine, anyone can build a short list of great companies and have it ready. Don’t worry about “catching the bottom.” When the news is flooded with stories about stocks crashing and darling companies being down 50% or more, the time is right.
It doesn’t mean you’ll make millions overnight. But it does mean you’ve got the best odds of winning that the stock market has to offer. I invested a lot during the Great Recession, but I didn’t have much money back then. I was determined that I wouldn’t let the next crisis go to waste.
When the Covid-19 crash happened, I bought like a banshee. It’s not that I’m a genius (unfortunately) or even because I have a lot more professional investing experience than most people. It’s because I’m following the path laid by just about every legendary investor since the beginning of time. And you can too.
That’s the strategy we’ve been deploying recently in Intelligent Options Advisor, one of our premium services with Wide Moat Research.
Just this month, I recommended put-selling trade with a best-in-class technology company trading near 52-week lows. Subscribers received an instant 7.5%, or potentially 50.3% annualized, yield on capital for doing so.
And in the event we’re put shares, our entry will be well below the 52-week lows, a level the stock hasn’t seen since late 2023. As I told readers at the time, the market’s pain will be our gain.
We’ll continue to deploy strategies like this in the weeks and months ahead. If you’d like to join us, or just learn more about our strategy, you can go right here.
Regards,
Stephen Hester
Chief Analyst, Wide Moat Research