In previous chapters, we looked at how a company’s value is the best predictor of its success in the future, regardless of market price changes. We also studied financial measures to see if a business was worth investing in. We looked at the functions of markets, their cycles, and how this information might benefit the logical, emotionless investor. Now it is time to hone in on yet another important aspect of the investing world-the masses of individuals whose collective daily financial decisions determine who wins and who loses in the market. Demographics is the study of people and how they change over time. Demographers collect and analyze data about a specific group, such as where individuals reside, how they spend their money, their age and ethnic background, and even what movies they enjoy watching and what they eat for dinner. This data is used to make educated predictions about how we will act in the future. Since we are focused on economic and financial behavior, it makes sense that we would study the U.S. population to make predictions about the economy and find good investment opportunities. Have questions about investments? Click here. Americans always want more, want it now, and think infinite growth is possible. But Kenneth Boulding, an Oxford-educated economist says otherwise: “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” The most significant population wave in our country’s history was created by the post-World War II baby boom in the United States. Between 1945 and 1963, around 80 million babies were born, accounting for more than 25% of the current population of the United States. More and more Americans are celebrating their 60th birthdays every month, and this trend is only accelerating. This has significant implications for the economy because as people age, their spending habits change. People in their 20s have different priorities than those in their 30s or 40s, affecting what they want to buy and how much they can afford to spend. Today, more than half of the population of the United States is making consumer and investment choices much differently than it did just five or ten years ago. This shift is primarily due to the aging of the so-called shadow generation, born in the 1930s and 1940s. As this group ages, their spending habits evolve, significantly changing overall consumption patterns. The demographic changes that are now well underway in the United States population will have a long-term influence on the economy. Harry S. Dent, Jr. is one of the modern pioneers in demographic research and prediction. He spent years researching people’s spending habits in industrialized countries and how those patterns change as the population ages after receiving an MBA from Harvard Business School. We all know that people behave predictably at various points in their lives. Because consumer expenditures account for approximately 70% of GDP, the spending habits of the country’s most influential demographic group significantly impact the economy. According to Dent, as large swaths of the population age, their most important interests (and thus areas where they spend money) shift as they progress through life. Following the money will lead you to where the growth is. The economy slows down when people reach and surpass their spending years since older individuals are less likely to acquire additional items or take risks with their cash. A person’s historical spending habits show that when they turn 60, they change how they act and invest. A person older than sixty is usually content with what possessions they have, and their main focus becomes enjoying life to the fullest instead of gathering more material items. They also become more conservative investors who look for stocks that provide them with a stable income. If demographic theories are correct – and they have in the past – our economy may face a lengthy period of slowing as the baby boomers mature and approach their peak spending years. According to Dent, there are distinct stages to human aging and spending. For example, people aged 18-22 are generally preoccupied with college and starting their adult lives. From 22-30, they may get married and rent apartments. In their 30s, they might begin to have families and buy their first homes. And by the 40s, they may be looking to trade up to larger homes–all while thinking about how to put their kids through college! By age 48, according to Dent, people’s expenditures peak. After that, individuals begin spending less and saving more as they retire. In their fifties, those with finances might consider purchasing a vacation home. People start cashing in on their equity, downsizing, and moving into smaller residences for retirement at around 66 years old. As people grow older, where they invest their money also changes. They start moving away from riskier growth-oriented investments and toward ones that offer security and income. Older individuals are less interested in purchasing huge houses or taking on debt. They avoid speculative investments with big potential payouts in the future and the significant risk of capital loss. The aging trend in the United States suggests that prices for investments that do not provide a consistent income stream, such as dividends or interest, could start to decline. A substantial shift in the direction of various investment sectors appears to be taking place. Income-oriented securities may well be at the start of a 20-year bull market as millions of baby boomers follow what mutual fund companies and financial advisors have been telling them for years: move away from growth investments and towards the income side of the ledger. People will seek to compensate for their reduced salaries or retirement by seeking alternative employment opportunities. Just like flowers need mud to grow, people need hardships to develop. Nelsa Cora Growth-oriented investments include anything purchased to sell later to someone willing to pay a higher price for it. Common stocks, land, non-income-producing real estate (such as parking lots), precious metals, rare coins, baseball cards, comic books, and collectible cars are all examples of this investment. We are talking about firms that do not pay dividends but are expected to expand rapidly in the stock market. These have been prevalent investments in recent decades among baby boomers who were investing for retirement. The generation that popularized drug use and dropped out of society is now reaching retirement age. In the next few years, more people in the US will be retiring than at any time since the late 1920s. Many aspects of the Roaring Twenties mirror our current demographics. A young population was earning good money and were more carefree when it came to investing, similar to how many people are today. This happy-go-lucky attitude led to one of the most impressive bull markets in history. By 1929, when the country was still reeling from the stock market crash and Great Depression, most Americans had reached retirement age. The economy halted, with millions no longer interested in investments that would bring growth. The income-oriented investments produce a return for their owners, regardless of whether the underlying investment’s regular market price rises or falls. An income investment is any asset that generates money without requiring the owner to work for it. This category includes a wide range of assets, such as interest-bearing bank accounts, utility stocks with dividends, dividend-paying mutual funds, bonds, and income-producing real estate. As the population ages, it is conceivable that a lot of money will enter all types of income-oriented investments, creating the opportunity for an enormous bubble. That might not happen for years, but income-oriented securities are a wise investment during that time. Income-oriented investments, like cash, have the potential to rise and fall in value in tandem with supply and demand, allowing skilled investors to take advantage of them. Consider a preferred stock with a par value of $25 that pays a fixed dividend of 5% each year and is repurchased at the stated price annually. When the market is declining, many of these types of investments typically fall to half their par value, or $12. Investors would earn a return of 10% and a 100 percent appreciation potential depending on future demand if the stock price were $120. Closed-end mutual funds could become more popular because they trade like stocks and are often available below their net asset value due to a periodic lack of demand. When no one wants investment-grade corporate bonds, for fear that a recession will turn into a depression, prices will collapse, and bonds with par values of $1,000 can trade at 50 cents on the dollar. Investors will also want to consider common stocks from reputable firms that have paid dividends for an extended period of time and have a track record of increasing the dividend each year. The “dividend aristocrats” are defined by Standard & Poors as companies with a long history of dividend hikes. The appeal of any investment that pays you not to work will be enormous as the population ages. They are usually considered a lot safer than something bought, assuming someone else would pay a higher price for it later. As we have seen, the Roaring Twenties was a time of great economic prosperity in the United States. However, this period was followed by the Great Depression, which lasted for about eight years. Today, we are facing another economic crisis. But with a bit of luck and decisive action by policymakers, this crisis may pass faster than in days. Another comparison for our study is Japan, which went through its demography in the 1980s. Most of Japan’s population was approaching retirement age like it is now in the United States. The Japanese stock and real estate markets nearly doubled in value throughout the 1980s, causing an all-time high in the Nikkei stock index in December 1989. Following that, the market bubbles burst, ushering in a decade-long depression. The Nikkei still trades at well below half of its 1989 peak as of this writing. Surprisingly, the emperor’s palace had appreciated such a high degree that the same quantity of yen could have bought all of California’s real estate in 1980. Such a tale now seems preposterous. Things had gotten out of hand during the Japanese real estate boom 20 years ago, when similar to the Nikkei, real estate values in major cities like Tokyo and Osaka were still well below 1989 levels. A demographic forecast model in the 1980s would have predicted Japan’s long business downturn. The theories on the correlation between demographics and economic trends by Harry Dent and others are both interesting and important. The premise that human behavior can be predicted as we age is not easily ignored. If you examine past stock market bubbles, you will notice they often correlate with a change in demographics. Demographics may also help us predict how well the United States will compete against developing nations. The median age in the United States was 36.7 years old at the end of the first decade of this century, compared with 43.8 in Japan and 43.4 in Germany. China’s median age was 33.6, whereas India’s and Brazil’s were 25.1 and 28.3 years old, respectively. Demographic research can offer investors valuable insights into economic trends and market forces. By understanding the demographics of a particular region or country, investors can better assess which investment categories are worth considering. However, demographic research should be used in conjunction with other forms of research, such as fundamental and technical analysis. Ultimately, the decision to make any investment should be based on a comprehensive review of all available information. The aging population is a significant force in the economy, and businesses that cater to their needs will likely see significant growth. Sectors such as health care, travel, financial services, and even the mortuary industry are likely to be major beneficiaries of the aging population’s spending power. Businesses tied to entertainment and leisure may also see increased demand from retirees who have more free time on their hands. If you are looking for growth stocks in emerging markets, you will find plenty of options in businesses that cater to young people. Families with children and young professionals are driving consumer spending in countries like India and Brazil, so companies that serve this demographic are well positioned for growth. Look for businesses with strong fundamentals and a solid track record of success in serving young consumers. The population of the United States is steadily aging, but we may escape the devastating deflationary spiral that has plagued Japan thanks to immigration. Immigration brings younger people to our nation and partially offsets demographic trends. As Japan faced its financial crisis, it had few immigrants to help breathe new life into the economy. My wife and I traveled to Japan recently. It was a great experience, but we were surprised at how little ethnic and cultural diversity exists there. Thanks to immigration, the United States will continue to have a young and vibrant population that can help keep our economy strong. Another factor that contributes to our nation’s stability during times of economic crisis is the government’s commitment to re-inflate the monetary base with new capital. By injecting new money into the system, it helps to ensure that prices remain attractive and money continues to flow into areas where it can be used most effectively. This commitment helps to maintain our economy’s strength and resilience in the face of challenging circumstances. There are several ways to find investment opportunities that the crowd does not yet know about. One way is to use company financial reports to identify companies that the market may undervalue. Another way is to study market cycles and demographics to identify potential areas of opportunity. Investors can make meaningful strides in their investment portfolios by taking action before the crowd. Let us move on to the main event-finding the Fallen Angel gems in the thousands of publicly traded stocks in the investing universe. If you are thinking about investing in stocks, you will need to do your research and stay up-to-date on the latest information. A great place to start is Yahoo! Finance, where you can find plenty of data on publicly traded companies. Remember that billions of dollars worth of securities are traded daily, so it is important to stay informed. The stock screener function on the site requires you to create a Yahoo! e-mail address and password, free of charge. After registering, log onto the main Yahoo! site and visit the finance page. You can also access this page by entering https://finance.yahoo.com/. The Investing tab will take you to the Stock Research Center, where you can find the stock screener on the left side. This tool lets you quickly identify stocks with the most promise as Fallen Angels and get you started on your investment journey. The stock screener cuts hours off your research time. It is a shortcut that allows you to build your screening criteria from a dropdown menu and generate a list of stocks in minutes. The software does the hard work for you. Analysts have devised many ways to measure a company’s value and performance. These measurements can give us critical insights into a company’s financial health, whether its stock is under or overvalued, and whether it might be a good candidate for investment. Investors must have the proper mentality before beginning the evaluation process. Long-term financial success requires a business owner’s mentality. Consider what kind of business you want to own before investing in stocks. Buying a share of stock is like owning a small part of the company. Debt-free businesses are more stable than those that have to borrow money for operation costs. When looking at a company’s financial statements, there are a few key things to look for. First, you want to see if the company has been profitable recently. This will give you an idea of how well they are doing overall. Second, you want to look at their debt levels. Companies with high levels of debt can be more risky investments because they may have trouble making payments in the future.” Would you want to own a firm that grows in value over time, with higher profits and earnings over time, or one that generates erratic and, at times, negative earnings? Many stock market investors never take the time to inquire about the quality of the company they are buying. They buy for various reasons (hype, fad, or something they read) without thinking thoroughly through their decisions. It is essential to feel like an owner from the outset. To assess business quality, we will use the following five screening criteria: These screening criteria help us find potential investments, but if we get more than 100 firms, it is too many to consider one by one. In this case, we must move on to the next step in the process. By applying these five criteria to a company’s current price, we can get a peek behind the stock’s market value to see how well the business is executing its primary goal: making money for investors. As we have seen, stock values vary for various reasons that are sometimes unrelated to how a firm operates. One of our five initial screening criteria is revenue growth. To be considered for Fallen Angel status, a company must have demonstrated consistent revenue growth for at least the past five years. This gives us confidence that company management knows what it is doing and is likely to continue growing revenue in the future. Investors often consider a company’s earnings growth a critical indicator of success. Since profits are essential to keeping our capitalist business system running smoothly, we want to ensure that management can grow earnings and keep the operation moving forward. While it is ranked third on our list, return on equity is the most essential indicator. Return on equity shows whether a firm is increasing the value of its investors’ stake in the company. Every business has a bottom line value, some on the plus column and some on the negative side of the ledger. We consider 15 percent or more return on equity over several years to be good. The longer a firm has outperformed industry norms with respect to return on shareholder’s equity, the more likely it is to continue doing so. One of the screening criteria we use when assessing potential investments is EBITDA margin. This metric helps us understand a company’s profitability from its operations before accounting for items like depreciation and amortization, taxes, and one-time extraordinary items. This revenue measure is important in determining the true strength of the underlying business. We are looking for companies with EBITDA margins greater than or equal to the industry average over the last year. This criterion helps us identify superior companies with strong fundamentals. The final screening criterion is debt-to-equity. Companies with no debt are better equipped to handle economic slumps and have more leniency to change with the market. Too much debt slows a company’s progress and takes away from its profits, so we only want companies with 40 percent or less debt compared to their equity. After the initial screening, we are left with a list of 140 businesses. However, this is not the end of the process. We will apply additional screening criteria further to reduce the number of companies on our list. While many of the initially screened companies will not pass the next round of valuation, the initial screen should provide a helpful list of high-quality companies. After a market selloff, recheck the list of first-rounders because some of the stocks may have become great deals. The following screen will focus on the underlying or intrinsic value of the investment. This is generally viewed as the second step in security analysis. First, you need to determine what you want to own (i.e., quality); next, you need to determine the price that you are willing to pay. This step helps us find the bargains. When it comes to investing, one of the most important things you can do is buy quality businesses at a discount. This is important for two reasons: first, paying a discounted price should allow you to achieve above-average returns over time, and second, paying a discounted price provides for a margin of safety if your analysis of quality or underlying value is flawed. Quality and value should go hand-in-hand; if you want to be a successful investor, in the long run, you need both. However, it is often difficult to find companies that exhibit these qualities together because, as the saying goes, “value is in the eye of the beholder.” Analysts may access similar information but come up with different valuation estimates. Our solution is to look at value from various angles. By examining businesses using the criteria below, we can usually get a good idea of which ones meet our standards. Here are the screening criteria for the next round: Screening criteria for the next round Given the above criteria for the first screen, as discussed above, the list of potential investments was reduced to 74. We are getting somewhere now, but we may reduce the number even more. One more valuation criterion will be used in our list from this pared-down roster of firms: capitalized earnings will be considered. When you use the capitalization rate to calculate a company’s present value of future earnings, you can better understand what the firm is truly worth. When we utilize the capitalization rate to compute a firm’s current value of future profits, we can understand what the business is worth. The most straightforward way to capitalize on earnings is by taking the current earnings figure and dividing it by a discount rate to find the company’s fair value. For example, if Company A presently earns $1 per share and the investor requires a return of ten percent (discount rate), he would be willing to pay $10 for the business ($1/.10). If right now, the business is trading for less than $10, then according to this analysis it could be purchased because its asking price is below what exceeds the investor’s required rate of return. We can obtain a best-case vs. worst-case valuation range by using multiple discount rates to calculate a company’s earnings. We will need to do this work ourselves since many free financial screeners will not perform the calculation for us. With a simple spreadsheet, we can determine capitalized earnings. If the risk-free rate, for example, is four percent, then the price in relation to the ten-year note would be $25 ($1/.04). This tells us that if we invest in a Treasury note, we can earn just as much as we could from a stock pick with less risk. All you need to do is weigh your options and determine what is best for you. Finally, we will use various discount rates more significant than the risk-free rate to compensate for the additional risk involved with stock ownership. Discount rates of between eight and ten percent are appropriate for well-established large caps since they are in line with stock market long-term returns. The higher the discount rate, the more conservative your valuation estimate will be. For smaller, riskier equities, we generally need a higher rate of return to compensate for the higher implied risk. We will divide the current price by value to obtain a price-to-value ratio once we have calculated our valuations. This will show an even lower number of firms. Using our prior selection of potential investments, we will locate 47 businesses trading at a discount based on an anticipated 8% return rate. We aim to purchase excellent businesses at a discount on their inherent value. We are searching for the ones that tumbled, but not necessarily in the same way as you might think. The pattern resembles an airplane’s landing approach, followed by a lengthy climb-out after touchdown. If you can get quality and price correct, your task is 90% done. Our next and last step is to go through several timing calculations to see if now is the right time to buy. Short interest is a good indicator of investor sentiment. If a lot of investors are betting that a stock will go down, it could be a sign that the company is in trouble. However, short-sellers take on a lot of risks, so their rewards are usually greater as well. If short-sellers have targeted more than 7 percent of a company’s outstanding shares, it is probably not a good investment. Insider ownership can be a good indicator of a company’s future prospects. If company executives and directors have a strong ownership interest in the stock, it may signal that they believe it is undervalued and has confidence in its future. Recent insider buying can also be a positive sign, as it shows insiders are willing to invest their own money in the company. When analyzing a stock, one of the key indicators we like to look at is moving average lines. These can help us understand a particular security’s underlying trend (up or down). Generally speaking, stocks trading above their 50- and 200-day moving averages are in an uptrend. During bull markets, we prefer to buy stocks when they are trading above these lines. However, if the stock is well extended from these lines, we prefer to wait for a pullback to the 50-day line before entering a position. In bear markets, it is not uncommon for stocks to break below their moving average lines. In fact, as of this writing, less than 15 percent of stocks in the Standard & Poor’s 500 are trading above their 26-week moving average. As value-oriented investors, we see these markets as an opportunity to buy quality companies cheaply. Unlike in bullish upward trending markets, we’re generally following stocks that are trading below their long-term moving average lines. We could miss out on potential deals brought about by a bear market by waiting for the price trend to reverse and pass above the 50-day moving average line. When a stock falls sharply, it can be challenging to know whether it has bottomed out or if it will continue to decline. Two technical indicators can help you make this determination. First, look at the price range over which the stock has been consolidated. This is a good sign that the stock has bottomed out if it is fairly narrow. Stocks that have fallen vertically may experience a V-shaped recovery but can just as quickly continue to fall. It is best to wait for stocks that have fallen to begin to form a bottoming pattern through consolidation before investing. We believe that the number of investors interested in selling the company is roughly equivalent to those interested in buying. But as time goes on, there will be fewer and fewer people left who want to sell. That is according to basic supply and demand laws, which means prices are likely to go up. There is no magic bullet when it comes to timing your investment decisions. However, paying attention to short interest, insider ownership, and technical indicators can help improve your odds of success. Ultimately, finding a great business and paying a fair-to-bargain price for your shares is the most important thing you can do. However, risk management is also critical. The above timing tools should be considered and applied to your investment ideas before you make any purchase decisions. General Dynamics (GD), a diversified defense contractor with operations in the aerospace, combat, marine, and information systems, was at one point a Fallen Angel but is now poised to become a Rising Star. It was the world’s fifth-largest defense contractor in terms of arms sales through 2020 and 5th largest in the United States by total sales. Whether reading this in 2009 or 2029, an examination of important financial indicators may still provide you with a lesson on how to screen and choose stocks worth your attention. In 2008, General Dynamics’ stock plummeted 33 percent from the year before to $52.76. While this was still within its 52-week low range of $47.81, it paled compared to its 52=week high of $95.13. The firm earned $1.4 million from 2003-2008, with revenue growing at an average rate of 14.7 percent and earnings increasing at an even faster clip, at 14.8 percent per year. Over the same time frame, the return on equity was a healthy 18.7%, well above our 15% requirement. Its price-to-sales ratio was very cheap at .74, far below our 2x earnings benchmark. The PEG ratio was less than 2, which is well under our threshold of two times earnings (PEG). GO’s debt-to-equity ratio was about 18%, comfortably below our 40% criterion (D/E). Finally, the company’s stock short sales percentage was nearly 1 percent, which reflects few investors were confident in GO’s share price decrease. In 2009, GD appeared to be a well-performing stock that was worth considering for investment. Our benchmarks indicate that GD’s stock was trading at a 16 percent discount to its conservative intrinsic value estimate of $61, which we derived by capitalizing current earnings at 10 percent, and a 33% discount to our high estimate, which we derived by capitalizing earnings at 8 percent. What if a stock you have chosen outranges all expectations and doubles in price (well beyond your intrinsic value estimate) in only a few short months? Alternatively, what if one of your Fallen Angels continues to fall while simultaneously declining, forcing you to buy more shares? These questions are relevant to portfolio management, so they should be addressed before making your first stock investment. Having an exit strategy before investing is the last step toward successfully investing in Fallen Angels. There are two main types of exit strategies: technical and fundamental. A technical exit strategy relies on analyzing market trends to identify when to sell. A fundamental exit strategy focuses on selling when the security reaches its intrinsic value. Which type of exit strategy you use will depend on your investment goals and objectives. When it comes to diversifying your portfolio, there are a few things you should keep in mind. Generally, a portfolio comprising 20-30 stocks provides adequate diversification. You also do not want any one stock to make up more than 4% of your total portfolio value. In addition to stock diversification, you should also consider sector diversification. A good rule of thumb is not to invest more than 20% of your portfolio in any sector. This is because sectors tend to move in cycles, so having exposure to several sectors can help smooth out your returns over time. Below are the 10 S&P Global Industry Classification Standards (GICS) sectors: The next step is to plan an upside and a downside exit when you first enter your position. In the best-case scenario, purchasing Fallen Angels would allow us to acquire exceptional firms at bargain prices and keep them forever, benefiting from compounding returns for years to come without any frictional turnover expenses (commissions and sales charges) or taxes to worry about. There are many situations where you will want to sell your stock. Still, the fact is that at some point, one of your equities will become extravagantly overpriced or undergo a significant and fundamental shift for the worse. Alternatively, you’ll discover a better investment opportunity elsewhere. In any of these cases, you will want to sell your stock. When considering buying a stock, it is important to have an upside price target in mind. A 25 percent gain over the high intrinsic value estimate is typically seen as a level at which selling all or part of the stock would be advised. However, downside exit strategies can be trickier to implement. If the price of a company you have invested in declines significantly, this may present an opportunity to buy more shares at an even more favorable price than your initial purchase. Therefore, if a company is gradually falling apart, you should sell it before it becomes worthless. To avoid this mistake, you must continuously monitor your positions and run screens regularly so that any significant changes to the business are brought to your attention. Many great businesses may not make it through a very rigid screening process for selecting stocks. However, this does not mean these companies are not worth investing in. There could be numerous reasons why a company does not pass the screen, such as slightly lower-than-average EBITDA margins or sales growth. However, improving in these areas could still be a wise investment if the company is improving. Remember, while a rigid screening process is essential, it should not be the only factor considered when making investment decisions. Rerunning your screen periodically is important to identify new companies that meet your investment criteria. Additionally, applying the methodology enumerated in this guide to open-air ideas (companies whose products you like, etc.) can help you determine if there is a fundamental investment rationale behind the concept. As we have seen, with the proper preparation, anyone can become a successful investor in the stock market. Following a systematic and disciplined approach can significantly improve your chances of achieving your investment goals. One of the most important aspects of successful investing is knowing how to value a company before you buy or sell its stock. This requires looking beyond rumors, recommendations, and news releases, to assess a company’s true worth. By using fundamental analysis, you can get a clear picture of a company’s financial health and prospects for future growth. This will help you make informed investment decisions that are more likely to succeed. If you are an investor, it is important to understand panic selling and how to take advantage of it. Panic selling is when investors sell their stocks or bonds after a sudden price drop. This can be an excellent opportunity to buy stocks at a discount. However, it is essential to research the companies before investing carefully. You do not want to end up buying a stock that is about to go bankrupt. When in doubt, consult with a financial advisor. When we panic, we tend to make irrational decisions that can cost us a great deal of money. Neuroscientists have observed what happens to the human brain when presented with a sudden, scary financial surprise. Blood rushes to the area of the brain that causes us to freeze up. This is the same neurological response that occurs when a deer is confronted with a pair of headlights. A cool head and careful attention to the fundamentals can help us make a lot of money when others are fearful. We can take comfort in the historical data accumulated by stock and bond market researchers as we instruct ourselves to override our instincts when necessary to achieve our financial objectives. We must keep in mind that markets fluctuate, and what comes around goes around. If you had invested a single dollar in stocks back in 1802, by 2004, that same dollar would have been worth $650,000. That’s compared to only $1,090 for bonds, $294 for Treasury bills, and a measly 1 cent gold. And the value of the actual dollar itself? It was worth 6 cents of its original value by 2004. Since 1802, when Alexander Hamilton, the first US Treasury Secretary, launched the first stock, stocks have generated a real return of 6.8 percent per year after inflation has been considered. Every decade, stocks have increased by about double when inflation is considered. Another way to look at stock market fluctuations is through the lens of the animal kingdom. After all, markets are large gatherings of people competing to acquire and trade commodities. People are merely large-brained animals in fancy clothing when you consider it. Watch wild animals amid an attack on the Discovery Channel. You understand that they run a significant danger by performing what is necessary to survive. The hunter may swiftly become the hunted at a watering hole or while feeding. Many businesses operate similarly. Large and small firms that continue to develop must take chances, which may expose them to risk. If companies that have stopped growing at their old pace continue to horde their billions, it could be years before shareholders see any rewards. As earnings plateau, management will come under fire from impatient investors. One way for management to save face is by acquiring smaller growth companies, but either way, the company needs to grow or die. Big businesses rush to make transactions and frequently over-bid until they drop. When this happens, insiders who want to sell their shares to an unsuspecting public at or near the top reap the rewards. The dangers are considerable and comparable to those faced by animals daily. Animals take risks to get food for more than just hunger. The same emotions drive them as humans: pain, pleasure, fear, and security. Understanding this commonality between animals and humans allows great marketers to play on our emotions to sell a product or service. For example, remember how you talked yourself into needing that new car or cell phone upgrade? The ideal Fallen Angel stock produces or sells goods people want and are happy to pay for without hesitation. Customers hurry to obtain the product and then justify the expenditure later. While larger jungle predators may never take over these types of businesses, they will eventually make us money. With all the market uncertainty, it is an excellent time to remind ourselves of the three conditions that create Fallen Angels: stocks undervalued by the market that are due for a rebound. Good companies often get caught in price drops with everything else during turbulence and become Fallen Angels temporarily. Here are the three most common forces at play in these situations. Madison Avenue marketers have used adoption theory for a long time to determine product life cycles. Nowadays, more money managers are taking note of the idea since it aids in predicting hot sectors and equities before they’re all exhausted. The basic concept is as follows: three personality types make up the market buyer population. Those who adopt new technologies or ideas before anyone else does are typically willing to take on more significant risks for the chance of a higher reward. These early adopters often discover stocks that have not yet risen in value, as they form only a small part of the total potential buying power. When most people discover something new and big, they tend to add it to their buy list, which drives up stock prices. You will be greatly rewarded if you can identify these early majority buyers and get in on the action early. People who adopt new things late are often the last ones to jump on board. They are usually just now getting around to setting up an email address. By the time the early and late majority are done making purchases, the late adopters come in trickling. They always buy at or near peak prices, thinking that investing in what has become standard “successful” stocks is safe. Because late adopters require a lot of assurance from the crowd, they are only comfortable with winners. And since all the big buying power has been spent, the next logical step in this cycle is usually sideways before prices drop. The lesson from this tale is: get them while they are cold! Charles Dow, the journalist who co-founded the Wall Street Journal, had a different perspective on market cycles–he saw them as ocean waves. They start small, gradually build until they peak, and then disperse. Right, when the “bargain hunters” or most informed investors are buying is where we want to be with our Fallen Angels selections. The aftermath of a recession, bear market, etc., is an excellent opportunity to buy low. The second phase, known as the public participation period, is quite similar to Madison Avenue’s early and late majority phases. Trend followers begin to participate, and prices rise swiftly. The distribution phase begins near the wave’s crest when the informed money (the early adopters) exits, but most investors are still buying enthusiastically. The mutual fund and pension industries are under enormous pressure to produce results on a calendar basis. This often leads to portfolio managers making short-term moves they would prefer not to make out of fear of losing their jobs. This can result in some investors panicking and making decisions based on fear rather than logic. However, it is important to remember that these industries are designed to produce long-term results and that short-term losses are not necessarily indicative of future performance. Fund managers often sell stock to their customers to create a tax loss, which the customer can then write off on their taxes. However, based on current tax rules, the manager cannot repurchase the same stock for at least 30 days after selling it. This often results in the manager losing money on the proposition if the stock prices have gained during that time. Managers sell at a loss in December for tax purposes, and because the mutual fund industry is expansive with constant selling, stock prices hit an all-time low right after tax-loss selling occurs. By the time managers wait out the required 30 days, share prices have recovered to some degree, but they may still have to pay more for stocks than their original selling price. In other words, they are providing a service to their clients but sacrificing companies they would instead hold onto long-term. When intelligent people or companies make foolish decisions, they stand to lose a great deal of money. The same goes for intelligent investors; if a company makes an error, a vigilant investor has the opportunity to profit from the mistake. Regrettably, the majority of stock market participants are shortsighted. No matter how brainy an investor is, emotions will invariably influence their reactions. This is why so many individuals invest in mutual funds that have been deemed top performers despite this not always be the wisest decision. Investment managers are constantly pressured to rank among the “best” funds. This pressure can lead to shortsightedness, and managers may get caught up in selling shares on bad news. Instead of buying when companies are out of favor, many mutual funds do the opposite to “window-dress” and create the appearance of holding only winning stocks. When managers make the costly mistake of selling on bad news, it creates new opportunities for bargain hunters. “Many investors mistakenly believe that mutual funds are a guaranteed way to make money in the stock market. However, the reality is that most mutual funds actually underperform the market. There are several reasons for this, but investor behavior is one of the most important. People often buy into mutual funds only after the market has already risen. This influx of new money causes fund managers to buy no longer cheap stocks. When the inevitable market correction comes, investors often panic and liquidate their holdings, forcing managers to sell at or near the bottom. This behavior can lead to significant losses for mutual fund investors.” Companies on Wall Street that are big and strong to the point where no one can compete with them are well-known as gorillas. They typically have better reputations, sell for less, and have what is perceived as better products than their competition. Plus, they are easily accessible to their customers. The automotive business is dominated by gorillas like Mercedes, while Home Depot reigns supreme in the home improvement realm. Small hardware stores cannot hope to compete with a category killer like Home Depot, which is why so many have closed their doors. The spider monkeys and chimpanzees are the smallest merchants, with Home Depot being the enormous gorilla. The few little hardware shops that have survived figured out a method to live alongside the giant guy; they are like pilot fish that swim safely next to sharks, finishing up whatever is left over. Perhaps they provide services such as delivery or installation, which Home Depot cannot offer as quickly or inexpensively. Small companies may even shop at Home Depot if they cannot get better pricing from their suppliers. Currently, Costco is a leading retailer in the warehouse club sector. Most of their business comes from small retailers purchasing goods from Costco and reselling them to their customers. All of the members of the Dow 30 are potent companies in their own right. The Microsofts, Chevrons, Wal-Marts, and others that make up the world’s most famous stock index have significant influence. Smaller companies learn to work with them because it is difficult to compete against these gorillas. They depend on smaller companies (that they may refer to as chimps or spider monkeys) to keep supplying them with what they need – in this case, metaphorically bananas. When any of the three driving forces that produce Fallen Angels enter the market, even the market gorillas lose weight. Their market capitalization, or worth of their outstanding shares, goes down, and their collective values drop. These are among the most significant opportunities for investors because senior executives may not have lost their top positions in the industry. By keeping an eye on gorillas, you can buy them when they are cheap and eventually make a significant profit. Here are some other places where you can find similar bargains. Other successful capital allocators include Loews Corp. (L), run by the Tisch family; Leucadia National (LUK), operated by Ian Cumming and Joseph Steinberg; Allegheny (Y); White Mountain Insurance Group (WTM); Pico Holdings Inc. (PICO); Eddie Lampert’s Sears Holding (SHLD). By investing in the best capital allocators, you join them on a successful journey of making their money work for them. They invest their own money and their shareholders’ capital wisely, always looking for the best opportunities. Like great chefs, they not only consume what they make but invite others to come to enjoy it as well. To achieve success, all you need is patience and a willingness to dedicate time to researching which companies will be the most lucrative to invest in once the recession ends. On average, recessions only last four to seven years– use that as an approximate guide when making your decisions. If you are looking for short-term investments, try considering firms with seasonal businesses such as tax preparation. GARP, or growth at a reasonable price, is when companies that have been priced correctly dip in value for unknown reasons. The sudden price decline causes many investors to flee the company. However, this opens up opportunities for more experienced investors who can see past the current circumstances and the company’s future potential. These companies may not seem cheap at first glance, but they are undervalued compared to their growth potential. If a book’s value is increasing at 15 percent per year, and there are prospects for continued growth, it can be profitable despite being uninteresting. An outstanding GARP stock grows steadily, is predictable, and demonstrates stability. When GARPs go on sale, savvy investors snap them up. Though they may have healthy underlying business models, sometimes companies can find themselves in the middle of an industry-wide slump. For example, this occurred with steel companies in the 1990s when people wrote off U.S.-based steel manufacturers as outdated. However, by 2002-2003 these same businesses had become some of Wall Street’s leading sectors. The reason for the comeback was that the Third World did not stop construction despite the severe global financial crisis. Large-scale projects such as building skyscrapers, roads, bridges, and infrastructure improvements continue to require a lot of steel. In 2020, many companies rose again after their initial decline in the early 2000s. As of 2000, Disney was not only known for its theme parks, movies, and iconic animated characters like Mickey Mouse–it was also a massive conglomerate that owned Touchstone Pictures, the ABC television and radio network, The Mighty Ducks NHL hockey team, and the sports network ESPN. In total, Disney had a market capitalization of $38 billion. However, it was estimated that if Disney were to sell all its assets (i.e., real estate and business holdings), it would fetch 50 percent less than what those assets are actually worth–anywhere from $70-$100 billion. Activists are individuals who try to push companies to take actions that will boost the stock price. This might include buying back shares or making other changes that they believe will increase the value of their investment. When high-profile activists purchase shares in a company, it becomes public knowledge due to disclosure rules. So if you are interested in following this strategy, pay attention to financial news and look out for these opportunities. When Southwest Airlines first offered rock-bottom prices to customers with no legroom and only peanuts as a snack, they disrupted the entire airline industry. These “little guys” may not have fancy lounges or first-class seating, but they can keep their fares low by leasing space from established airlines. A company specializing in fish tacos might seem odd at first, but it could be successful if done correctly. For example, Starbucks caught on quickly because they did something different with coffee. These things catch on, and small companies that are not well understood because they are different from the mainstream can present great investing opportunities. Unknown returns are inevitable in investments, so we must focus on what is knowable: the tangible. The sooner we accept this fundamental truth about investing, the better off we will be. The predictions we are constantly bombarded with from all corners of the world – sports, Oscars, politics – should be taken with a grain of salt. This is especially true in the finance world, where people routinely jump to conclusions about what will happen long before it actually occurs. Someone is predicting anything on television. There is no shortage of informed speculations regarding issues ranging from soybean futures to the greenback’s worth to the influence of La Nina on next year’s South American sea bass catch. The analysts who make future predictions in the media are very convincing- so much so that people who have been investing for a long time are always impressed. If they were not good at persuasion, they would not be given such a platform to share their views. While some investment analysts gain huge followings, this can make them more dangerous. People tend to believe what these experts say and then invest their money based on the advice. These so-called experts back up their forecasts with facts and logical reasoning, making their analyses seem compelling. But the truth is that occasionally they are right while often, they are wrong. Rarely is the information provided by these commentators consistently useful for those trying to make investment decisions. Why do we follow bad advice, even when it is plainly wrong? Because we want somebody- anybody-to guide us. We are creatures of habit that crave comfort and security. So if a supposed financial expert says something, we would rather believe them than deal with the scary reality ourselves. No one wants to feel isolated and alone when making decisions in an uncertain market. You do not even need to have well-thought-out opinions as long as they come from a widely considered reliable source. Greenspan was an economic oracle at the peak of his power and was famous for his obscure utterances in speeches and Congressional testimony. The media and financial industry put his words under a microscope, desperately attempting to wring profound meaning from them. But Greenspan was not the type to drop hints to his listeners about his true intentions. Even Greenspan’s wife, television journalist Andrea Mitchell, once confessed that he had to propose three times before she understood what he was trying to say. We should all be skeptical of financial predictions, especially when they come from a credible source. When Alan Greenspan was Fed chief, journalists, and analysts would spend hours pouring over everything he said, looking for comfort in his words. Looking back, we should have been more cautious of his predictions based on his track record. Over Greenspan’s 30 years as an economic consultant to various presidents and 19 years as Chairman of America’s Federal Reserve, he could not anticipate or stop any significant financial crises. Greenspan’s lack of ability to predict the future was evident early in his career, starting with Ford’s failed Whip Inflation Now campaign. A stock market crash followed this during his first two months as Fed Chairman, then the savings and loan crisis and real estate crash of the early 1990s. Later, in 1996, he famously warned about “irrational exuberance” in stock prices. These words of caution were repeated and circulated only months before the stock market began what we now know was the beginning of the most rewarding bull market in modern history. The capstone to this long and remarkably inconsistent forecasting record has to be in 2005, a year before his last term at the Fed. Speaking to a convention of mortgage bankers, Greenspan advised publicly that homeowners should consider converting their fixed-rate mortgages into adjustable-rate loans to save a little interest and lower their monthly payments. When adjustable-rate loans were introduced, they seemed a great idea because they offered lower interest rates than traditional 30-year fixed mortgages. However, the world’s most informed monetary experts failed to foresee rising interest rates’ devastating effects on millions who took out these loans and became overextended. As a result, Greenspan stated in his June 16, 2008, letter to Congress that he was “shocked in disbelief” at the approaching failure of the financial and credit systems during the 2008 financial crisis. He acknowledged that his fundamental assumption – that banks would act in their own interests rather than take risks – was incorrect. In addition, he admitted that greater regulation would be required to restore stability to the United States financial system, despite his long-standing opposition to such government restrictions on free market capitalism. Mr. Greenspan dedicated himself to public service for the bulk of his adult life and is highly respected for his work. He never intended to deceive anybody. He was just as stumped by the future as everyone else. George Santayana’s words are correct: “Those who cannot remember the past are doomed to repeat it.” Successful financial predictions are difficult to make for various reasons, especially when it matters most– during economic turning points. Even if a prognosticator correctly predicts the big picture, many smaller factors can still influence markets. Gregory/Litman Asset Management’s founder and chief investment strategist, Ken Gregory, avoid macroeconomic forecasting. Many who attempt to interpret the economic tea leaves to profit fall far short of expectations. He cites the disintegration of the Soviet Union and the fall of the Iron Curtain as examples. Forecasters predicted that those events would lead to a surge of investment in former Soviet satellites, and they were eventually correct, depending on when you invested. Many people were wrong about what would happen after Iraq invaded Kuwait, the tech bubble burst, and the September 11 terrorist attacks. For example, many said that commercial air travel in the United States would decrease so much that the government would have to take over airlines. But within a few years of 9/11, passenger numbers had gone back up to where they were before the attacks happened. After 9/11, experts thought that terror attacks would become rampant in the US; however, this never happened. They also predicted that companies associated with defense and homeland security would see a massive increase in business and profit due to a fervent spending spree–but again, these predictions did not come true. While some contractors received more business than others, on the whole, the sector was a letdown for investors. In other words, it is challenging to make macroeconomic forecasts during periods of instability, as the future appears more cloudy and uncertain. When current trends seem stable and easy to map out, forecasts are not as helpful because this information is already known by many people and reflected in the prices of financial assets. In simpler terms, the costs are based on a known future. Many people focus on forecasts, but if we want to make money off of investments, we must find out information others do not know yet and take action. Once the news is common knowledge, it will not do us any good because this new information would have already influenced share prices. We can get an idea of what might happen in the future by studying past patterns. We can go through a company’s track record for the previous five years to determine future revenue growth indicators. However, you would never drive a car, only looking in the rearview mirror. It is just as hazardous to make hasty judgments about the future based on past events. As we will see, placing too much faith in analysts’ predictions regarding specific firms is dangerous. The one thing I cannot do is provide you with experience; all I can do is suggest methods for you to get your own. Tom Bulkowski, Encyclopedia of Chart Patterns Many investors, however, wait for a stock to drop before downgrading it and recommending that it be purchased. They wait for confirmation, which is too late to help investors. The analysts are basing their forecasts on data that has already been reflected in the stock price. Timeliness is not everything; however, it is not uncommon to see late or off-the-mark improvements. It is generally a bad idea to rely on analysts’ recommendations when making purchasing or selling decisions. Only 25% of downgrades occurred within a third of the stock’s yearly high in a bull market, according to author Tom Bulkowski, while they would do the most good. In a bear market, things were even worse; only 13% of forecasts came near the yearly high, implying that 87% had already fallen by the time the analyst yelled, “sell!” This is where Tom advises that if a stock’s price is lower than what it was before an analyst gives their opinion about the company, wait for some time so you can buy it. Tom says that based on Bulkowski’s research, people usually begin to feel more positive again. He suggests waiting until after the frenzy of selling has calmed down to make your purchase. Analysts consider the company in question’s performance and the sector in which it operates when creating stock predictions. For example, a software forecast for a firm might consider global demand for software and trends affecting the software industry, such as a requirement by businesses to enhance their IT capabilities due to competitive or technological advancements. Unfortunately, sometimes industry trends people predict do not happen as they thought, and investors who invest based too heavily on those predictions can lose money. Former Vice President AL Gore won an Academy Award and Nobel Peace Prize for his efforts to bring global warming into the public consciousness. People may be unaware that the former VP put his money where his mouth is. Gore became a co-founder of Generation Investment Management, which invests in companies with ecologically sustainable practices and good corporate citizenship. According to public filings, Generation’s portfolio included companies such as Whole Foods, Staples, Aflac, and Becton Dickinson. When he launched the investment firm in 2007 with his partners, Gore anticipated that energy-efficient technology and green business practices would take off soon. He not only expected this change would improve the environment but also increase his net worth. Green investments, on the other hand, have experienced a setback. As of early 2009, the firms that Gore and his team had chosen had lost an average of 50% or more. Whole Foods was slowing down; Staples was barely hanging in there; Aflac had financial issues; and so on. General Electric is the most well-known troubled firm with significant green technology investments. The point is that we need to focus on what is knowable. It was probably easy for Gore to believe that his research could be helpful in portfolio management because he had already received global attention for bringing awareness to climate change. And it made sense that this attention would turn into economic action since the green technology movement is steadily gaining popularity. As citizens of the world, we all must take these steps. The world must take action to protect our environment and natural resources. This issue affects us all and is one that we cannot afford to ignore. We have seen the devastating effects that climate change can have on our planet, and it is clear that we need to do something to stop it. The world must come together to find solutions to this problem and quickly. We can take many steps to protect our environment, but we must act now. We cannot wait any longer – the time for action is now. Let us work together to make a difference. When making investment decisions, it is important to remember that economic forecasts should never be taken as the gospel truth. Instead, they should be seen as one of many factors to consider as part of a larger strategy. There are a number of reasons why economic forecasts can be inaccurate. For one, they are often based on historical data, which may not accurately reflect future trends. Additionally, different economists can have different opinions on the data’s meaning and how it should be interpreted. Cycles expert Bill Meridian has said that all failed cycles-based forecasts can be blamed on Bogus, an unknown planet that might exist in our solar system. In other words, having gone through many cycles in the past does not guarantee that it will do so again in the future. But, as is often the case, what rises eventually returns to its origin. And when it reaches the bottom, it goes much faster than it did while ascending. For example, he tells the story of a New Yorker who made $30 million in 15 years by shorting stocks. When asked why they prefer to short stocks instead of holding them, the man explained that it would take hours to climb the Empire State building, but jumping off will get you there in seconds. Meridian’s views on predictability are interesting and have some basis in reality. However, it is important to remember that the future is always uncertain to some degree. This is especially true regarding specific events that may happen a year or more in the future. While cycles and forecasts can be helpful guideposts, it is essential to approach them with a healthy dose of skepticism. And be especially cautious of anyone who claims to know exactly what will happen down the road. After all, even the best-laid plans can go awry in the face of unexpected chaos. Investors who can take advantage of market surprises stand to make a lot of money. Investors can profit from the market’s irrational activity by being aware of the potential for these surprises and taking quick action. To be prepared for market surprises, it is important to stay up-to-date on news and events that could potentially spook the market. By being proactive and keeping an eye on the future, investors can position themselves to take advantage of market volatility. For example, in early 2009, Steve Jobs- the cofounder of Apple Inc., who is known for his charisma and innovative thinking- announced he would be taking a leave from his CEO position for health reasons. It had been speculated for months by many that Jobs, who had cancer in 2004, was suffering from an unknown illness that caused him to lose a drastic amount of weight. Even if the founder’s health was never revealed, certain things were clear: Apple stock fell out of favor as the “Jobs premium” on the stock declined. The share price immediately began to fall. Apple may not be the same company without the dynamic leader who had resurrected the firm from oblivion. Apple’s shine was dimming, and its shares reflected it in an already-known future. To predict Apple’s decline did not require a macroeconomic forecast. While this was occurring, competitors were gaining ground in the market. Research in Motion (RIM) was the dominant competitor that created the BlackBerry. RIM’s stock rose as Apple declined, fitting the criteria for Fallen Angels. RIM was trading for half its intrinsic value; it had no debt and substantial earnings growth potential. People wanted more of its products, and its return on equity was 35%, rapidly compounding shareholders’ book value. At the time, some experts believed that Apple would fall in value and took profits from its anticipated drops in share price. RIM was an excellent investment, according to certain individuals. Paired trades, in which investors profit from capital flowing out of one business and into another, are made by doing such transactions together. These opportunities were only temporary and would only benefit those who acted fast. By the time you finish reading this, the fortunes of the two businesses may have changed. They could even be gone for good. Something new will undoubtedly occur. But do not worry about it for too long. When the knowable future begins to grip you, markets move swiftly, and so should you. Few people can accurately hit a small, fast-moving ball with a round wooden bat–and those who can make a lot of money doing so. Professional baseball hitters are successful if they manage to connect with only 3 or 4 pitches out of every 10 at-bats; however, the fact that .300 hitters are comparatively rare demonstrates how difficult it is to get a hit off major league pitching. The most incredible batters in the league wait for the fat pitch, the one with the highest chances of success based on their offensive capabilities and the pitcher’s shortcomings. Why is Ted Williams one of the greatest hitters of all time? He explains his strategy in his book, The Science of Hitting. In baseball, the strike zone is a rectangle that corresponds with the width of the home plate and the height of the distance between the batter’s knees and shoulders. According to Williams, he divided this small space into 77 “cells,” each equivalent in size to a baseball. He noted that by swinging at pitches in the highest probability cells, his batting average would remain above .400. However, if he reached for balls located in his worst cell–the bottom outside corner of the strike zone–he would only hit .230. Williams’ feat is even more impressive when one considers that he batted .406 in 1941, the last time a major league player hit above .400 for an entire season. Williams realized that if he waited for the best pitches, he would have a more successful career than if he chased low-probability pitches. Warren Buffett and other famous investors have read and recommended The Science of Hitting. As an investor, your primary focus should be on finding the right market for you. Do not try to tackle every opportunity that comes your way; instead, focus on the few that offer the best chance of success. Doing so will increase your chances of coming out ahead in the end. Determine which stocks, bonds, or other investments make you feel most at ease. It will be commodities for some, real estate investment trusts, or bonds for others. Some people prefer small, rapidly growing firms, large blue chips, or exchange-traded mutual funds to larger organizations with a longer track record. You might favor companies based in your own neighborhood that you are well-versed with. When the investment falls into your personal best cell and satisfies our criteria, go ahead and swing! The value of your investment should rise if it generates money and the income stream grows over time. Look for value first and dividends second. Look for firms with a track record of increasing their dividend every year, particularly if you are unfamiliar with dividends. Consider this: According to John Bogle and Vanguard’s research, dividend income has accounted for 50 to 75 percent of real annual stock market returns. An investment of $10,000 in the S & P 500 at its inception in 1926, with all dividends reinvested, would have grown to $33 million by September 2007. Without dividends being reinvested, the original $10,000 invested in 1926 would have grown to about $1.2 million by now, resulting in an absolutely staggering difference of $32 million. In other words, the past 80 years or so of reinvested dividend income has accounted for almost all of the compound return earned by public firms in the S&P 500 index. While nothing is certain, knowing a company has a history of paying dividends and growing those dividend payments annually can help you make a reasonable short-term forecast for the future. There is more than 80 years’ worth of statistics dating back to the 1920s showing the value of dividends, proving that companies have continued to make and grow their dividend payments through wars and multiple recessions, panics, crises, and crashes. Being an informed investor is key, and one way to do your due diligence is by knowing where current payments to shareholders are coming from. That way, you can make sound investment choices for yourself. The belief is that markets are always correct. I disagree with this view. I suppose that markets are always incorrect. George Soros The world will come to an end only once, and it is unlikely that it will happen anytime soon. So do not rely on a doomsday prediction as the basis for your investment decisions or planning. Instead, keep a calm demeanor while others are losing theirs, and you will come out ahead in the long run. During an economic downturn, it would not benefit you to convert all of your assets into gold and bury it in the backyard. If you tried to buy a house, car, or pay for college tuition with gold instead of cash, you would realize that cash is still worth more. It may be challenging to find a Realtor, vehicle dealer, or university admissions office that readily accepts all of that metal. Gold is heavy, unpredictable, pays no interest, and must be stored. As an investor, your ultimate aim is to accumulate as much filthy lucre as possible: cold hard cash. The best strategy, from my experience, is to observe the market and world detachedly and stick with investment techniques that have been previously successful when things are rough. Approaching investments systematically will be of the most help during these times. Bad news may be your greatest ally, providing you with unique chances to make money – sometimes a lot of money – which we shall explore further in this chapter. I will also provide a strategy for managing your portfolio throughout your investing career and tips for when it is the optimum moment to sell your possessions. But first, let us put the market’s ups and downs into perspective. Whenever the economy dips, a small group of people always surface to voice their extreme predictions of civilization’s downfall. For example, after the subprime mortgage crisis and Wall Street’s collapse, many financial experts published books envisioning conditions similar to those during the Great Depression. However, it is not limited to financial issues: In recent years, equally bleak expectations have been made on a number of subjects, including AIDS, SARS, mad cow disease, and the collapse of the US dollar, to mention a few. The worries have generally turned out to be overstated. Remember the hullabaloo about Y2K? I went to a party in 1999 where the host had heeded warnings about a worldwide computer shutdown. Experts with good intentions frightened the public before the turn of the century, describing possibilities in which the world’s computers, having been programmed for years with only two spaces for the year digit (leaving out the 19), would be unable to function when the numbers reset to zero at the start of the new century and therefore would shut down. People were concerned that computers running critical systems such as banking, healthcare, security, and air traffic control would freeze up and create digital gridlock, turning our modern high-tech society into a caveman’s paradise. Our party host had set up a generator and his water filtration system to prepare for the worst. Even the Federal Reserve got into the act, flooding the system with cash to forestall a potential bank run. The Y2K crisis was one of the biggest overreactions in history. Billions were spent worldwide on a problem that did not even exist. When the world did not end at midnight on January 1, 2000, the Fed decided to return half of the excess cash it had so generously given to the financial system a few weeks later. Some claim that after Y2K, the Fed’s actions sparked the tech Bubble’s collapse in 2000. Over the years, the financial markets have had their own issues. Since 1970, the International Monetary Fund has recorded 125 distinct financial crises in different countries worldwide. Since 1970, the United States stock market has gone on average every eight years. According to research done by Stanford University professor James Van Horne, before that, there was an average 14-year time gap between market collapses throughout history. Some experts say financial and corporate deregulation is responsible for increased market disruptions. While market panics may be common, they can still have a devastating effect on those who are caught off guard. However, careful planning and the right strategy make it possible to profit from these events. Speculative bubbles, which cause market crashes, have almost always resulted from too much farmland and real estate lending. People become very pessimistic about the future whenever there is a crash. When it comes to money, many people are blind to the future. Perhaps it is human nature to desire immediate gratification. People frequently want to get everything they can and forget about the future when it is available. That has not changed for thousands of years, and there is not much indication that it will soon. According to Benjamin Graham, every investor should have a set selling policy for their common stock assets that reflects their buying methods. Several “crash-proofing” investors’ portfolios are available to members of the investing community. They previously urged individual investors and institutions to diversify and invest in emerging markets, such as China, Russia, and Brazil, as well as commodities and leveraged hedge funds. This advice has proven detrimental to investors, with many emerging market currencies, such as the Indian rupee and Turkish lira, losing half their value. When the storm of 2008 hit, emerging markets, commodities, and levered hedge funds was among the most severely impacted investment sectors. Preparing your investment portfolio based on a doomsday scenario is extremely speculative and hazardous. Many writers who wrote books about preparing a portfolio for Doomsday were proven incorrect, with their investments declining even more than the broader market. Oil prices fell from $150 per barrel to around $35 per barrel, and commodities tumbled. The commodity sector lost twice as much as the stock market. The dollar, which was supposed to fall, gained strength, and foreign currencies strengthened. Even gold and silver, long-heralded safe havens, suffered substantial losses. You will need to look beyond the present storm if you want your money to work hard, so you do not have to. In a bear market, you will most likely spot your biggest winners. You will not realize it until later. They are bound to drop further when you find bargains and buy them. Nobody purchases at the bottom or sells at the top, and you certainly will not either. All you have to do now is get within striking distance. When it is time to sell in a bull market, prices will continue to rise even after you have exited. That is just how things work in an unpredictable world like ours. It is better to be roughly correct than precisely wrong, according to John Maynard Keynes’ words.” We thrive on good news. However, there are four seasons in a year. In the winter, Bermuda shorts, bathing suits, and tank tops go on sale, while bulk overcoats and snow shoes are available throughout the summer. Despite your reticence to purchase what is out of fashion, bargains abound for those who anticipate the next market cycle ahead of time. Conventional thinking may be dangerous and incorrect because it makes assumptions about how situations will progress. We have heard numerous times that the stock market would return 10% yearly. However, the facts tell a different tale. The Dow Jones rose from 66 to 11,497 during the 20th century, according to Warren Buffett’s 2008 annual report. When compounded yearly, however, the increase shrinks to 5.3 percent per year. Anyone expecting stock market returns of 10% each year by purchasing and holding is mistaken. According to Buffett, the stock market would need to produce 10% yearly returns over the next century for the Dow to reach 24,000,000 by 2100. This is not going to happen. You must think and act differently from the crowd to make money in the financial markets, real estate, or a company. That is when bad news may become your friend. Consider businesses to be organisms with numerous components, cells, and organs. The bigger the company is, the more complicated it becomes. And the more complicated it becomes, the more prone it is to get sick due to little problems like the common cold. Every firm gets a cold now and then or experiences a letdown. The company’s best-laid schemes or expectations did not go as planned or ran into an unforeseen issues. The three main reasons for a company to become a Fallen Angel all have to do with different types of bad news and circumstances that prevent earnings and revenue growth. As you know, recessions, market crashes, and other industry-specific disruptions can be difficult to recover from. However, recognizing when the disruption is temporary or permanent is the key to finding winners during and after these events. Understanding this distinction will make you better equipped to weather any storm. An excellent example can be found in sports when the best athletes are injured. At some point in every athlete’s career, their abilities begin to deteriorate with age. When an athlete is sidelined due to an injury or a slump, his “stock” goes down in the market, as team owners become concerned about being stuck with a pricey contract that does not translate on the field. Coaches and managers must decide if an athlete is dealing with a recoverable setback or if the glory days are gone. Ultimately, they must determine whether a player’s stock is improving or declining. Share prices can plummet by half or more when the stock market drops sharply. Investors must use screening techniques or another formula to determine whether their investments are worth purchasing, holding, or selling when the stock market falls. Like athletes with team doctors examining them to determine if an injury is temporary or chronic, investors want to ensure their portfolio is sound. Just as companies go through seasons where their popularity rises and falls and face occasional problems, so do stocks within those companies. Perhaps the firm was sued and had to pay a large settlement that wiped out the year’s earnings. Alternatively, a new product might have turned out to be an albatross rather than an eagle. If the crisis is only for a short time, In 2008, there was a market crash that had far-reaching consequences. However, this type of event can actually be an opportunity for investors. When the markets crash, everyone rushes to sell off their investments and retreat to safer ground. This causes the value of everything in the market to shrink, including high-quality companies. So if you are willing to take on some risk, a market crash could be an excellent time to buy low and hope for a rebound later on. Using the screening approach, you may spot and target Fallen Angels stocks. Despite their name, crashes are infrequent; statistically, they only occur every eight years or so, implying that they are not a viable component of an ongoing investing plan. When stocks go down, it is easy to get caught up in the chaos and do what everyone else is doing. But if you can avoid following the herd mentality, you will be better off in the long run. When bear markets occur, that is actually when savvy investors make their money. The key is to buy stocks when they are low, even though they may not feel comfortable initially. You may feel more secure if you know that you have thoroughly investigated the investments and confirmed their foundations are solid. Instead of falling, you purchase inexpensive and timely stocks through your study. Your pool of available prospects should increase dramatically due to any 40% or more market value collapse. You are seeking equities and other assets that are not going to sink much lower. Many people focus on how to buy things when they think about investing, but one of the most important aspects is actually selling. For most investors, this can be one of the hardest parts. When we find investments that do well, selling them is tough. But as your investment portfolio grows, you will need to think about it like a farmer thinks about crops. They start with a plot of land and, if they are successful, end up farming multiple pieces of land, totaling many acres. It would be difficult for one person to keep track of everything, which is why there are so few farmers. Almost anyone can grow a small backyard garden successfully, but running a farm requires extra skills in organization and management. The farmer understood that he would not always have a perfect crop but proceeded to plant various crops based on the seasons. Furthermore, he diversified the mix of different crops not to put all his eggs in one basket. The farmer tilled the soil and fertilized regularly as he had patients waiting for his crops’ full potential. When it was finally time, harvest came quickly so as not wonderful ruin everything by either acting too soon or waiting too long. Another pro tip from old farmers is rotating your land’s crops so you can get peak performance each year! In 2006, when corn became more valuable because of its use in biofuels, innovative farmers around the United States and other countries positioned themselves similarly to cash in big time on this new trend. Just as farmers rotate their crops to take advantage of different seasons, investors move from sector to sector following the market’s cycles. The key to managing your investments is to build a diversified portfolio and buy at a discount, which gives you some margin of safety. The couch potato strategy entails dividing your portfolio into bonds and stocks, depending on your age. For example, if you are 30 years old, a well-balanced portfolio should include 30% bonds or other risk-free investments and the remainder in equities. A 50-year-old would have 50% in bonds, while a 70-year-old would have 70%. Young adults should protect themselves by investing in less risky stocks so that they have time to recover if something happens and their investment fails. On the other hand, older people should avoid placing all of their money into safe investments; instead, they should spread it out among different types of investments. This leaves them vulnerable to the ravages of inflation. In summary, investors should shift their portfolios around as they mature to keep the ideal combination of riskier investments that could have greater rewards and reliable investments with more modest returns. To be a successful bargain investor, you must diversify your portfolio and stay up-to-date with market cycles. Investing in growing companies gives you time to wait for the stock price to snap back (which it inevitably will). Knowing when to sell is equally vital to selecting the correct equities at the right moment. We will go through some of the indicators that let value investors know when it is time to harvest their profits or cut their losses. Sell at least half of your position if you are ever confused. Sometimes, it is clear that selling your business is the best move. Here are three tell-tale signs that now is the time to sell. 1. The factors that led to you initially buying the company are no longer valid. For example, the company’s share price has risen, or new information about accounting issues has come to light. Rather than wait for things to improve on their own, it is time to take action and sell the stock. Many investors do not realize that the share price is decreasing because the fundamental data is inaccurate. You must be proactive and admit when you are wrong to disgrace yourself with a massive loss. Before making your final decision, always run the company you are considering investing in through your screening process one last time. If the stock price decline is due to only a temporary setback, this could be an opportunity to buy more shares while they are cheap. However, if something has fundamentally changed about the company since you first researched it–for example, a key team member left or new competition emerged–that is different. You bought the stock based on circumstances and assumptions that no longer apply, so you have to watch out for falling into irrational hope instead of staying rational and level-headed. According to psychologists, it is difficult for investors to sell at a loss. Because the agony of losses is twice as bad as the pleasure of gains, it is tough for people to sell at a loss. Taking a loss feels awful. We anticipate profit when we invest; therefore, the enjoyment is tempered by our expectations. The anguish of a loss is much more severe. An old saying on Wall Street goes like this: your first loss is always the smallest. If you wait too long to sell, your losses will only increase. Do not let what you put money into turn into a guessing game. 2. Profits arrived sooner than expected. This is the favorable problem that every investor wants-profits generated earlier than expected. Why is this a problem? Because it tricks your mind. You bought a stock for $30, expecting it would go to $60 in five years (15% per year) because fundamental and technical criteria were met. The numbers looked promising, so you took the chance. In a nutshell, the stock market tends to return 10% per year on average. But wait, instead of 15%, you are getting a 100% return in only one year! It happens, and it is fantastic when it does, but it throws your investing discipline out of whack. Rapid success may cause you to be overly optimistic about the future. If you find that your original investment will more than triple in five years, sell at the minimum half of what you own. By selling half, you are ensuring that you recoup your initial investment while still profiting from any gains on the other half. It is important not to be overly optimistic. The psychology is similar to that of a gambler hitting the jackpot in Las Vegas. All of a sudden, the gambler believes he is on a roll, and he usually lets his earnings ride. Most gamblers wind up giving their winnings back to the house; if that were not the case, the owners of MGM Grand, Caesar’s Palace, and other casinos along the strip would not be as wealthy. Unfortunately, the same psychology and identical outcomes are too prevalent in stock market trading. When equities rise spectacularly on good news and outpace the actual worth of a firm, they typically level down within a short time. There is also anecdotal evidence to support this assertion. During any market cycle, a large number of investors regret selling their darlings- whether it was Google, Schmoogle, Apple, Orange, or Tutti-Frutti. As a value investor, you have already evaluated the company’s fundamentals and determined them to be adequate. The crowd, including investment and institutional money managers, has recognized what you saw earlier: that the firm is creating wealth for shareholders as it grows in size. If the price rises dramatically, individuals who own large winners are inclined to wait for further appreciation. However, that is unlikely to happen. The finest gamble, in my opinion, is to take some profits. If you think yours will outperform the odds and continue rising, sell half of your holdings and pass on the risk to someone else. If a stock you bought in anticipation of a double over the next five years increases by 100 percent in value within one year, you can sell your investment and place the money into a savings account for the next four years. This strategy would allow you to exceed your original investment goal with less risk than if you had held onto the stock. Why not everyone does this is unclear. So, if a stock’s price rapidly appreciates, it becomes overpriced in relation to its actual worth or is based on positive future predictions. At that stage, the original justification for buying the stock–that it was undervalued–was no longer accurate because the price had since risen too high. The enterprise value has not increased by 100 percent, meaning its current trading price is likely not feasible or sustainable. It is based on the idea that everything will go well and value will accumulate in the future. It may eventually stabilize at or near actual value, which means a lower price once again if it does not rely on fundamental growth to support its higher share price. After a short time of appreciation, only public sentiment has changed, and we understand how quickly this can alter the market. If investors are bidding up your shares at nearly any cost, it is your responsibility to sell to them. The equation changes when the stock appreciates as planned, but to make a wise investment, you should constantly reevaluate after three to five years. This will determine whether the company still meets your screening criteria and if it is still growing at an attractive pace. If so, there is no need to sell – holding on may be the best option. 3. When a prime opportunity appears. Some people refuse to part with blue chip stocks they had held onto for years. Perhaps the stock carried sentimental value because it was initially owned by their grandfather, parent, or spouse, or maybe they used to work for the company. From their sensational return in the past to just an average return now-over time and through numerous market cycles, people who have been in the business for years sometimes make this investment mistake. A portfolio manager has owned many of the same stocks for his wealthy clients’ accounts for quite some time. When asked why he hangs on to these companies when they are no longer growing, he said they would eventually be growers again. Additionally, he stated that these stocks are like old friends, and he is attached to them. Perhaps he believes that they are partially responsible for his successful investment career. People tend to gravitate towards familiar brands and often view them as safer options. However, in my opinion, assuming something is secure can be dangerous. It is like attempting to compete in the Major Leagues with a roster of aging former superstars whose names everyone knows. They are legendary yet no longer competitive. Every investment is made to make a return, but how do you know if you are getting a good return? By comparing your potential returns to other types of investments, especially those without any risk. This will give you a good idea of whether or not you are making a wise investment choice. When considering investment options, it is important to consider risk and potential return. A relatively risk-free investment, like Treasury bonds, can offer a guaranteed return. But if expected returns in the stock market are higher, then selling your stocks and investing in bonds may not be the best option. You can measure the potential return of a riskier investment against the return on safer investments. This will help you decide whether the extra risk is worth it. If the stock market is doing well, but you do not see the same investment returns, it may be time to reconsider your strategy. The market cycle swings up and down with the different market sectors. It is comparable to a big commercial farm, where crops are swapped out periodically. On Wall Street, stocks compete with bonds, while commodities such as oil, gas, and building materials vie for attention with technology, defense, and consumer goods in the first half of this decade. You were in the right place at the right time if you owned oil and gas businesses or other commodity producers like steel, fertilizer, copper, or wood in the first half of this decade. Stocks fell rapidly at first, and then they began to rise owing to the optimistic projections of enthusiastic and compelling analysts. Many of them increased by two times or more in a year. The market cycle changed abruptly, and commodity stocks started to fall. Analysts wrote optimistic reports with forecasts based on dwindling supplies and rising demand, yet those who held onto their stocks lost all or most of their gains. They would have been much better off if they had followed the first two rules for knowing when to sell: Rule number 3 also applied because once the stocks became overpriced, many other low-risk investments would have been a better use of money, such as bonds or Treasury bills. Here are a few more words on managing your portfolio for the long run: Keep an eye on your holdings monthly so that you are updated regarding their status. This can help you avoid unpleasant surprises. I recommend that you examine your portfolio once a quarter and ask the following three questions: This three-step approach works for any investment or asset class and will help you stay on track as you compete in the game of investing. If you follow the steps in this guide, you will enjoy a successful investment career while increasing your financial security in an uncertain world. Making smart investment choices is essential to financial success. When it comes to safe and effective investment, paying attention to the amount of risk as well as potential return is key. Evaluating your options against each other can help you determine if the extra risk is worth it for the potential return. Many investors find themselves drawn to familiar brands, but this does not necessarily mean that they are making a wise investment decision. Over time, market cycles will change and it is important to be aware of these changes in order to make the best investment choices. Reviewing your portfolio on a regular basis can help you stay on track and avoid surprises.A Peek at the Future Through the Science of Demography
The United States Population Is Growing Older
The Dent Forecasting Model
Investment and Growing Old
Growth Investments
Income-Generating Investments
The Japanese Economic Collapse
Demographics: A Forecasting Tool?
The Fallen Angels Formula for Picking Stocks
Screen One: Business Standard
The Best of the Best
Screen Two: Getting the Best Deal
Is It Time To Purchase?
Case Study of General Dynamics
Managing Your Portfolio
Give This A Try
Use Panics, Corrections, and Volatility to Your Advantage
The Jungle and the Stock Market
What Causes Fallen Angels?
Crowd Behavior and The Adoption Cycles
Even Experts Gets Nervous
Disasters That Can Be Recovered From and Other Opportunities
Gorillas on Wall Street
12 Common Investor Opportunities
The Little-Known Chapter that Will Make You a Better Investor
Predictions Can Prove to Be Dangerous
Too Little, Too Late
Inconvenient Portfolio
You Should Be Afraid of the Yet-to-Be-Found Planet Bogus
Be Prepared for Anything and Everything
The Fat Pitch
Look For Your Own Fat Pitch
Why Not Get Paid While You Wait?
Do You Know When to Sell?
Do Not Become Too Pessimistic
Every Downturn Will End
Bad News is Your Friend
Market Crashes
When Is the Best Time to Sell?
Allocate a Percentage of Your Portfolio to Bonds Based on Your Age
The Three Signals for Selling
The Bottom Line
Safe and Effective Investments FAQs
The science of demographics is the study of population changes and trends. It can be used to predict future trends in the economy, housing market, and other areas. Demographics can also be used to target marketing efforts and understand customer behavior.
There are a number of factors that can be considered in demographic analysis, including age, gender, race, income, education, and geography. Each of these factors can have an impact on population changes and trends.
Demographic analysis can be used for a variety of purposes, such as predicting future trends, understanding customer behavior, and targeting marketing efforts. It can also be used to understand how changes in the population may impact businesses and economies.
One of the challenges in demographic analysis is that it can be difficult to obtain accurate and up-to-date data. Another challenge is that population changes can be complex and difficult to predict. Finally, demographic analysis is often used for forecasting purposes, which can be subject to significant error.
Despite the challenges, there are a number of benefits to using demographic analysis. It can be used to predict future trends, understand customer behavior, and target marketing efforts. Demographic analysis can also provide insights into how changes in the population may impact businesses and economies.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
