One of the secrets to making an enormous amount of money as a long-term investor is to be a big buyer of great companies in bad markets.
Its been Warren Buffett and Charlie Munger’s secret for decades. And one of the main reasons Berkshire Hathaway (BRK-A) became one of the largest and most profitable firms in the world.
If you track all the big moves made by the dynamic duo, most of them have been executed when markets were collapsing.
It sounds easy enough. Hoard cash and wait for a collapse…
…then jump in with both feet.
However, it’s easier said than done…
Just look back to late February and early March when it became evident that the coronavirus was going to hit the United States and hit it hard.
Stocks entered a free fall…
As the country was a complete shutdown of the economy.
None of the news was good, the Fed had not thrown the kitchen sink in (yet), and the panic was real.
Fear was heavy in the air, and all anybody wanted was out.
Out of the country.
Out of the big cities.
Out of the market.
Stepping in and buying into the puke-inducing fear is a tough ask.
However, we can’t go back in time now…
We must look forward.
And right now it’s all about being a buyer…
Whenever there is a broad pull back in the market…
What am I referring to…
And most importantly, how can you profit off it?
Last night, Dow Futures plunged 320 points after President Trump’s key trade advisor said that the trade deal between the U.S. and China was over.
It was reminiscent of when both nations exchanged a war of words in 2019, sending the Dow lower and lower. The markets have recovered after other members of the administration engaged in damage control.
But as I’ve said before – the breakdown of trade between the world’s two largest economies is a known threat with historical precedent.
Meanwhile, with unemployment levels surging, the Fed has moved out of uncharted waters and into the fourth dimension.
The central bank has acted and thrown money at the markets.
Congress passed out so much cash via extended unemployment benefits some people are making more on unemployment than they were making at their job. Markets have recovered most of their losses, and most traders are feeling pretty good about the situation.
We have even seen the return of the “uneducated, wild guessing, stocks only go up day-trading army.”
If we step back and look objectively, the set up for a collapse is there.
The ingredients for a perfect storm are out there, and if they come together in the right combination, we could see another colossal sell-off. The coronavirus is sweeping across the country once again. Political tensions are rising. Thousands of businesses are gone for good.
It would not take much to set a market collapse in motion.
So, how can we set ourselves up for success when everyone else starts panicking?
Target the Stocks You Want to Buy
One of the best ways to prepare to be a long-term investor gold medalist is to have the infrastructure in place.
First, let’s build the list of companies we really wished we had bought years ago at lower prices.
We are looking for game-changing companies that can help redefine the world. We want to look at these incredible companies that generate massive amounts of free cash flow and will be the blue chips of the brave new world technological advances will create over the next several decades.
You might want to add the current tech blue chips to the list. Owning Microsoft (MSFT), NVIDIA (NVDA), Cisco (CSCO), or Apple (AAPL) at prices 25, 30, or even 40% lower than the current price could be the base of a fortune in stock market profits.
Make a list of those stocks you want to own a lot lower.
How many shares do you want to buy for every company? Write it down.
Now, look at the last few years of stock prices. Where was the last big breakout or double bottom in the stock? Look for breakouts or bottoms at least 25% below the current stock price.
Place a lowball limit order to buy the desired number of shares at either the breakout price or the double bottom support.
Set the required cash aside to buy the number of shares you want to own of each stock.
Now do nothing.
Do not cancel those orders when the selling starts. The idea here is to put the infrastructure in place to be a bad market buyer of great companies.
Now, I do like to use cash-secured puts in a similar way.
But lowball limit orders offer different benefits to investors.
First, the cash-secured put requires you to buy 100 shares of the stock. Buying 100 shares each of Apple, NVIDIA, and Microsoft 30% lower would still require setting close to $70,000. A cash-secured put on Amazon would require about $270,000 for each contract sold.
With an out of the money limit order, you can buy odd lots and fit the order size to match your account size.
Second, you are not going to get paid much for shorter-term deep out of the money options right now.
Selling cash-secured puts is a better strategy when prices have already fallen, and volatility has skyrocketed. That’s when you can get paid fat premiums for buying stocks that have collapsed and seem to be poised for a rebound.
Long term stock market fortunes are made in bear markets. The bigger the bear, the greater the opportunity.
Out of the money limit orders to help you tame the bear and plant the seeds of your stack of generational wealth.
We’ll talk more about what’s happening in the markets on Thursday.