“Zach, We’ve got to start selling some positions today…“
The year was 2001 and my boss was unhappy. We had just survived one of the darkest periods in market history. The dot-com bubble had just burst. And as a young research analyst I had a front row seat to the carnage.
I couldn’t have picked a better place for my training. Bill was not just my boss, he was my mentor. And he taught me the importance of protecting your wealth during turbulent market periods.
While other investors were losing money, Bill had actually turned a profit for his investors.
And how did they thank him?
By pulling money out of our fund!
At first, it didn’t make sense to me. Why would our wealthy investors take money out of our fund? Clearly our fund was one of the safest places to be. And we had just proven our worth in one of the worst market periods in history.
The answer might surprise you…
And it also sheds some important light on what’s going on in today’s market.
Selling What They CAN (Not What They Should)
Our investors pulled money out of Bill’s fund because that was one of the few options they had left!
Think about it for a second…
These were affluent investors with money diversified across many different managers. And most of those managers lost money during the dot-com crash. (Some lost a lot of money!)
Bill, on the other hand helped to preserve their wealth.
But in early 2021 these investors needed cash to pay for living expenses. And they had an important choice:
Should they pull cash out of investments that were down significantly?
Or should they call up Bill who still had all of the money they originally invested — along with some extra profits to spare.
I’m sure you can guess what happened… Human nature is to sell investments that still have most of their value.
Meanwhile, we tend to hope that other positions will eventually come back.
But if we’re thinking rationally (instead of emotionally), we’ll probably make a different decision.
Because over the long run it makes more sense to keep money in the profitable investments. And if you need cash, it’s usually best to take it from underperforming investments.
There’s a lesson here that applies to our current market environment.
Good Stocks Fall For the Same Reason…
Over the past year, many of the most popular stocks on Wall Street have suffered terrible losses.
You know the names… Peloton Interactive (PTON), Zoom Video (ZM), Teladoc Health (TDOC), Roku Inc. (ROKU) — and the list goes on and on.
Cathie Wood’s ARKK Innovation fund has been fully invested in these names — with devastating results:
I’ve been warning you about these stocks for months. And hopefully you were able to avoid losing money as speculative high-flyers came back to earth.
Maybe you even profited from their declines using some of the positions from my Speculative Trading Program.
But lately we’ve seen a new group of stocks trading lower.
Investors have been selling some of the best names on Wall Street. And they’re using the same faulty reasoning our hedge fund investors used back in 2001.
Since their speculative stocks are down sharply, these investors are selling what they CAN sell. The profitable companies with stocks that are still valuable.
And these “sellers of last resort” are starting to push even the most healthy stocks lower.
Believe it or not, that’s good news.
Signs of Capitulation — Better Days Ahead
The selling of high quality stocks over the past week or two tells me that we’re getting close to the end of this bear market.
At the very least, we’re approaching a tradeable rally — one that could lead to some big profits as the markets start to rebound.
When good stocks go on sale, it gives smart investors a chance to pick up shares at discount prices. And these stocks should be quick to rebound once investor confidence returns.
Investor fear is palpable.
According to Bespoke Investment Group, 50% of Nasdaq stocks have lost more than half their value.
The put-call ratio has reached extreme levels.
And legendary traders like David Tepper are covering bearish bets.
Despite the lower prices, I’m actually encouraged by the recent action. As investors, we have a lot of opportunity in front of us.
Because if you can keep calm when everyone else is panicking, you’ll be in a great position to grow your wealth over time.
Focus on good companies that generate reliable profits and are trading for reasonable stock prices. These names will help protect your wealth and give you healthy returns as the market rebounds.
Never make an investment decision out of fear.
And please stay in touch! I’m looking forward to bringing you some of my favorite rebound plays as we head towards better days in the market.
Here’s to growing and protecting your wealth!
Zach