The media really loves a good “Fear” story.
On Saturday, I checked off the usual weekend publications.
CNBC is peddling the next stock-market correction.
TheStreet says a stock market crash is “increasingly likely.”
At MarketWatch, I’m seeing headlines about Warren Buffett predicting a stock crash and why you need to heed his warning.
There are prophets preparing for another crash at countless other publications.
Here’s a little secret: They’re really trying to scare you into clicking the article.
This week was a pretty textbook downturn in tech stocks after a straight line upward over the last few months.
That profit-taking gave media outlets the chance to warn you of crash monsters hiding in the closet and stirring under the bed.
In most cases, it just scares me that so many people have no idea what they’re talking about and act like selloffs are the end of the world.
The Cialis ads running on these networks and the drug’s side effects are scarier than a pull back in the stock market.
The reality is, I want stocks to go lower.
Because I want to make a lot of money.
That might sound like a paradox, but I assure you it’s not.
Let me explain.
Investing is a life-long process. I’m building a long-term portfolio that I can hand off to my children one day.
The first step is adopting a different mindset.
You have to learn to “love the down”.
Fortunes are born in bear markets.
As a trader (as opposed to an investor), I like positive momentum.
When trading in short terms, I want to buy things that are going up and sell things that are going down.
But when I’m making generational investments, I want to buy things at bargain basement prices and own them for a very, very long time.
Trading and investing are entirely different businesses.
They may both involve stocks, but that’s where the similarities end.
Think about firefighting and car washes.
They both use water.
That’s where the comparison ends.
They’re entirely different businesses.
When I’m trading, I really don’t give a damn about what business the companies whose stocks and options I am trading are in.
It’s pretty irrelevant. I am not going to own the position long enough to care.
Is the price giving me the signals I need to see to set up a trade? That’s all that matters.
I don’t care how much money they make or what the price to free cash flow ratio is at the moment.
Up or down is irrelevant. If the signal is up, I will buy calls or sell puts or put spreads.
If the signal is down, I will buy puts or sell call spreads.
I am trading on price.
It just happens to be the price of stocks.
When investing for generational wealth, there are rules.
I care very much about what business they are in.
It matters how much cash the business generates.
It matters if they can pay their bills.
It matters that this is a business that will be in business and prospering for a very long time to come.
Lessons from Hetty
Everyone knows the “Wolf of Wall Street.”
But have you heard of the “Witch of Wall Street?”
Back at the start of the 20th century, the richest woman in the world was a New Yorker named Hetty Green.
Hetty had inherited some cash from her father and turned into a fortune.
She was reportedly as mean as a snake. She was also so cheap that her son had to have his leg amputated because she could find a free clinic to treat his injury. She also slept with a gun because – she was convinced that people wanted to take all her money away.
She was so cheap, mean, and paranoid that she earned the moniker the “Witch of Wall Street.”
But Hetty Green got rich because she learned to love downturns in the market.
Back then, there was no Fed to micro manage the economy. Financial panics happened a bit more frequently that they do today.
When a panic came along, Hetty waded in with as much cash as she could gather. She’d buy stocks, real estate and mortgages when others sold stocks and property in a frenzy.
When conditions improved and the economy turned into a bubble, she simply sold everyone back the stock and properties they had sold her during the panic.
Hetty’s love of the down market built generational wealth.
She died in 1916 and left an estate of $100 million to $200 million (equivalent to $2.35 billion to $4.7 billion today).
When her last child died in 1951, there was still about $200 million left.
The money was donated to schools and hospitals.
Another Man Who Loved the Down
I can show you a lot of examples of people who learned to love downturns.
The best example is naturally Warren Buffett.
He might be warning about a crash right now, but I assure you he would welcome a big drop in stock prices right now.
As the head of Berkshire Hathaway, he is one of the richest men in the world.
Because he loves bear markets and he wants to put money to work when others are taking part in a fire sale.
That’s what took him from rich to incredibly rich.
This is something we will talk about again.
But just remember: The media wants to scare you so they can pick up eyeballs and sell ads.
Do you get upset when steak goes on sale?
Would it be a disaster if bourbon prices fall?
If that 60-inch TV you have been eying is on a 50% off sale will that make you mad or will you run out and buy it before the price goes back up?
That’s the mindset you need to apply to generational investing.
Buy the companies you want to own when the market is having a sale.
It’s that simple.