A Survival Guide for the Worst Market Crashes, Part 1

The Fed recently raised interest rates for the third time this year.

And that begs the question…

Is it time to start worrying?

It must be. After all, popular economic theory dictates that rising rates make fixed-income investments more attractive than equities. Investors will sell stocks and buy bonds, being the rational, thoughtful folks they are all the time.

Higher interest rates also mean higher interest costs for corporations and consumers alike, forming the double whammy of lower profits and lower spendable income that will inevitably ensure the stock market tanks.

The folks on TV look pretty worried about it. So we should be as well, right?

Heck no! If you want to worry about something, there’s a veritable smorgasbord of much more worrisome crap out there…

We ignited a trade war with several allies that could hit the economy pretty hard if it lasts for the foreseeable future.

We have seen lower results from key Apple suppliers that indicate we may actually see a slowdown in iPhone sales. GE is looking to sell assets at almost any price to pay down its debt and survive its current difficulties.

We have India and Pakistan hoarding almost 300 nuclear missiles ready to go, and they detest each other for sound, well-thought-out national and religious reasons.

Oh yeah, and the midterm elections are over, with the GOP keeping the Senate and the Democrats taking the House. Look for Washington to become a very shrill, loud, and obnoxious example of gridlock at its finest.

Isn’t that better? We took those sissy interest rate worries and put some hair and fangs on them. When it comes to worrying, my motto is “go big or go home.”

That’s because I’ve been in this game for over three decades, and I’ve profited handsomely through some of the most worrisome times in the history of the United States.

So let’s take a look at some of those times…

The Sky Is Never Actually Falling for Those of Us with Market-Proof Accounts
The sky may have been falling for the majority of investors during the various market downturns in recent history, but they could have profited if they had the right assets in their portfolios.

The following examples are evidence:

The 1997 Asian Financial Crisis

The first worrisome event from recent history that truly scared the hell out of everyone happened just before the dot-com bubble and started on the other side of the world.

I’m talking about the Asian financial crisis that started in 1997 and caused a market sell-off that terrified everyone at the brokerage firm where I worked.

I remember looking at my market screener on Oct. 27, 1997, as the Dow dropped a massive 7.2%. People worried the crisis would ruin Russia’s forex reserves and cause the country to collapse entirely. The big tech stocks were cratering, and our margin clerk was busy for the first time in several years.

But if you were a broker like me who built market-proof accounts consisting of undervalued REITs and corporate liquidations, you were doing just fine as the rest of the investing public lost its mind.

My brokerage also had lots of cash, opening up an opportunity to buy the huge dips that came as Long-Term Capital Management LP infamously dissolved at the turn of the millennium. Closed-end funds were also hard hit, so I naturally bought stakes in the ones specializing in Russia, Mexico, and France that were at 150% to 200% discounts.

The 2001 Dot-Com Crash

Not long after, the Internet bubble burst, and I had about as much fun as you can have while sitting at a desk.

After years of ignoring the hot tech stocks and “being stupid,” I was suddenly smart again. Once high-flying behemoths like McDonald’s Corp. (NYSE: MCD) and Apple Inc. (Nasdaq: AAPL) plunged as much as 80%. It wasn’t hard to find cheap stocks in any sector, and I had more cash than I knew what to do with since I couldn’t find anything to buy before the sell-off, when everything was so stupidly expensive.

We also bought REITs on the cheap while everyone was snatching up the popular companies before the bubble burst. Of course, once the ball dropped, our REIT holdings soared as investors sought safe, high-yielding investments.

The 2008 Financial Crisis

And of course, I’d be remiss if I didn’t mention the financial crisis a decade ago, which, despite its devastating effect on American families, presented one of the best value opportunities I’ve seen in my life.

On Dec. 5, 2006, when the market was rising to obscene levels, I wrote that, “You might be able to sell me the fact that this market is fairly priced, providing I’ve been drinking heavily – but undervalued, I can’t see it… We have rallied almost 12% since August without a real pause of any length, and anybody who is not cautious now pretty much deserves what they get.”

As you can imagine, it was not a popular opinion.

Once again, as stocks roared higher, I was hoarding cash and arbitrage trading to pay my bar tabs while other clients yelled at me for not owning the white-hot airlines and media stocks.

Just over two years later, the S&P plunged to its lowest level in more than 12 years.

In the midst of the turmoil around November 2008, I wrote, “As for the market itself, there is a fortune to be made over the next several years… I see an ever-growing list of companies that sell for less than cash in the bank. I am buying DAR, HDNG, DOW, ASH, and others like a crack addict at a rock convention.”

Those four companies were Darling Ingredients Inc. (NYSE: DAR), Hardinge Inc., pre-merger Dow Chemical Co., and Ashland Global Holdings Inc. (NYSE: ASH). I held them for about three years following the recession lows and ended up selling them for several times what I originally paid.

2018 – 2019?

If my strategies through these last three crises prove anything, it’s that you don’t have to be a rocket scientist to make a killing during bear markets.

Of course, as with any new market apocalypse, the general consensus is that “this one is so much worse than the last.”

So, is a potential hawkish-rate market crisis looming? As I mentioned earlier, the talking heads would have you think so – but sensationalizing is basically included in their job descriptions.

Here’s what you can really expect from the Fed’s new policy of pushing interest rates through the roof…

This Is What the Future Holds for U.S. Markets (and Your Bank Account)
The high-interest-rate environment we’re in right now may hurt the stock market eventually, but I think we’re safe for now.

I don’t know when a crisis-level sell-off will occur, and neither does anyone else, so doing anything in a panicky nature will only cost you money.

Just like I did with the Asian financial crisis, dot-com bubble, and 2008 financial crisis, getting through a potential interest rate–related selloff requires the same simple strategy…

You have to buy extremely undervalued assets that will yield huge profits as those assets return to their fair value. It’s the common-sense approach you hardly see anywhere in the news, yet it has made me insane amounts of money every time the sky falls.

And the best part is this type of investing requires simple, natural market timing. When the market is cheap, there are tons of severely undervalued stocks to buy. As the market moves higher, bargains get scarce, and our companies either get acquired or see their cash balances begin to rise, typically resulting in higher stock prices.

While this method works marvelously for me, I’m aware it doesn’t work for everyone.

Selling stocks when market enthusiasm is high, then buying them when everyone else is performing the margin-call puke, can be difficult. Fear and greed are powerful emotions that are nearly impossible to recognize when we’re caught in their embrace.

The other fundamental way to make money from the markets is through growth investing. I’ve never been a growth advocate, but it’s clearly worked extremely well for the people who like the free money that comes with pushing the S&P and Dow Jones to record pre-crisis highs.

I may own some of these stocks and take a few lumps from time to time, but the few that I do hold will have a large margin of safety in their balance sheets. I consider the financial and credit condition of a company before I buy any shares. I favor companies in solid shape, so there is not much chance of them disappearing from the planet.

I cannot control market movements, but I can be careful about what I own.

With that in mind, I embraced my inner geek and dug up two other, more radical investing methods that can effectively let you “hear the market speaking.”

These two methods were developed by two interesting gentlemen – one a former California beach bum, the other a former Marine, both now millionaire investors. Their approaches will help you avoid the noise and keep your money reasonably safe when the walls come crashing down.

I’ll be back with all of that in Part 2 of this series, so stay tuned.

— Tim Melvin

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Source: Money Morning