In less than a month, Japan’s NIKKEI 225 stock market index fell nearly 30%.
U.S. markets held up better, but all the major benchmarks had their worst days in years. Many stocks – maybe even some that you own – declined by over 40% since the start of the month.
And these aren’t all risky micro-cap stocks, either. Tech heavyweights like Intel (INTL) and Super Micro Computer (SMCI) are both down 40-45% in the past month.
Cryptocurrency is supposed to be the savior during times like these. Bitcoin declined by over $15,000 as the market sold off. It had a big up day on August 8, yet it’s still down about 19% from 52-week highs. That’s a lot worse than the S&P 500 Index and not much of a “chaos hedge” if you ask me.
I love staying glued to the markets during times like these like everyone else. Some do it out of fear, others out of sheer curiosity. Either way, it’s all too easy to be consumed and paralyzed by the chaos.
My friends and colleagues know what I think about market corrections. There are few things I look forward to more.
Today, I’ll explain why and give a concrete example of how to transform everyone else’s panic into your profits.
Lessons From the Trading Floor
The present volatilty feels unique. It always does.
But it’s the same story with different characters. I was a professional trader at a long/short hedge fund during the Great Recession, and here’s a lesson I picked up early on from the senior traders:
When the stock market crashes, wealth transfers from the scared to the brave.
The larger the stock market decline, the more frequent people check their brokerage accounts. If it’s bad enough, they’ll spend half the day just hitting refresh on the browser to see the carnage in real-time.
But that’s not what the senior traders taught me. They said ignore the chaos and look for deals. And you have to react quickly, because the panic will soon become greed once the market stabalizes.
The first thing I noticed was the CBOE S&P 500 Volatility Index, known as the VIX on Wall Street. It soared over 200% since August 1, and intraday on August 5 it was up 300%.
So what did I do? I sold options.
The VIX is a major factor in setting option premiums. By selling options, I was turning other people’s fear into cash in my brokerage account.
We did the same thing on August 8 in our Intelligent Options Advisor service that focuses on selling put options on high quality stocks trading at attractive valuations. That service, by the way, has an 80%+ win rate on our put options writing/selling strategy from inception of November 2022 through last month.
Looking for Bargains
The second was returning to a specific set of great companies I wanted more exposure to. Since Q2 2024 earnings season began, 21 out of 22 (95%) of Industrial companies in this sector beat earnings estimates.
Thanks to the sell-off, several of the top stocks I wanted to buy were back to where they were before they announced stellar Q2 earnings results in recent weeks. That kind of deal rarely happens without a little blood on the streets to navigate.
Why were Wall Street analysts so wrong about the Industrial and Materials sectors? Materials is a little easier. Industrial companies are often their largest customers, so if they are killing it, Materials companies share in their success.
In my view from reading their reports, these mega-bank analysts don’t realize just how powerful the reindustrialization of America is. It’s something we talk about often at Wide Moat Research, but most firms don’t.
We focus on generating attractive income from high quality investments many others overlook. This trend is funded with trillions of long-term investment. There are economic and political risks that can slow it, but nothing can derail this train.
As of the latest data from the Federal Reserve, there is nearly $223 billion in annualized inflation-adjusted manufacturing spending in the U.S. That’s more than double the same period in 2020 or 2021, and nearly $1 trillion every four years. And that’s before accounting for the fact spending is accelerating.
As a bonus, both major political parties’ policies support this trend. Some politicians prefer tax cuts to specific companies, and others just want to hand them bags of money, but they both agree on the theme.
And both recent administrations are all-in on tarriffs. You can argue that’s not great for America overall, but it’s clearly a win for these industrial heavyweights that no longer have to compete with China or Russia.
Conclusion
Market volatility is part of the game. You know it’s coming, it’s just a matter of time. It’ll seem uniquely terrifying every time.
But the U.S. debt has been a disaster for a long time. The Federal Reserve never really knows what to do with interest rates. And every U.S. Presidential election feels like the country will rip in half. Yet, we have the numbers: 12.58%, 10.16%, 11.47%, and 10.64%.
That’s the S&P 500’s annualized performance over the last 10, 20, 50, and 100 years, respectively.
And if you want to beat those statistics, one of the best and more reliable ways is to buy into market crashes. Have your strategy and investments lined up in advance, and use the chaos to your advantage. That’s precisely what we aim to do at Wide Moat Research.
Remember, when stocks fall, wealth is transferred from the scared to the brave.
It’s time to be brave.
Regards,
Stephen Hester
Analyst, Wide Moat Research