Greedy When Fearful

Non-financial news talking about the major declines in the market.

Market volatility is how the rich get richer. Buffett calls this being greedy when others are fearful. Hedge fund managers call it buying the dips. Market panics are going to happen just like the sun shine will eventually turn to rain. You don’t need to know when if you always have an umbrella nearby. Follow that rainbow afterwards and you will find a pot of gold.

With the Dow down 3.5% today, I thought this would be a great time to explain my latest purchase and the strategy behind Headline Crash Cash. This strategy is a hybrid of my favorite investors (Buffet, Lynch, Gardner, Cramer).

The first rule of headline crash cash is you must always have cash available to buy stocks during a major panic.

The second rule of headline crash cash is you must ALWAYS HAVE CASH AVAILABLE to buy stocks during a major panic.

Not investing cash that is already in your brokerage account is like trying to keep a really awesome Tyler Durden secret to yourself.  It takes discipline just to let all that money just sit there, “doing nothing.” Think like a Vulcan. Warren Buffet always keeps 30% of his wealth doing nothing so when the world melts down he can loan it to Goldman Sachs or Bank Of America.  I came up with a similar strategy that has been working quite well for me and keeps me disciplined. Here is my system:

1)     Any deposit you make into your brokerage account, flag 25% as HCC. Track it in a spreadsheet with three columns. The date, the total deposit amount, and the 25% HCC. At the bottom of the spreadsheet, have a “Headline Crash Total” to keep an ongoing tally. Never touch this money unless…..

2)     Non-financial news is talking about the major declines in the market. For example, the front page of MSN says “Dow off 400 on recession fears.” A local talk show host, Doug Wright, opens his show with how bad the markets are today. The markets will be down huge, somewhere between 3-6% just in one day.  Pictures of terrified traders will be everywhere. Your crazy uncle is telling you to buy gold and guns.

3)     On market close (2pm MST where I live), browse the Nasdaq 52 week low list and the NYSE 52 week low list. Write down any companies on this list that strike your fancy.

4)      Next, find which of those companies are the furthest away from their 52 week high.

5)     From that list, find out why they are hitting a 52 week low. The best investments are great companies that got pulled down with the bad (bathwater AND baby) from panic selling or great companies with temporary problems.

6)     Use 1/4^th of your money from step 1 and buy anywhere from one to a “basket” (equal shares) of these companies.  In the past 50 years, the Dow has closed either up or down 4% only 76 times. Five of those times occurred this year. By only deploying a 1/4^th, you will be ready for 3 more melt-downs. I usually buy after-hours in events like this or do a market order at the next day’s opening. This is because these stocks usually rally a bit the next day (though you might as well just flip a coin or ask your eight ball). The prices are already so low don’t argue about pennies with limit orders.

7)  Rinse and repeat until retirement.

This works best if you are buying individual stocks. If it’s an index fund or ETF, you probably just feel like you are riding a roller coaster. Individual stocks do not move together. For example, I bought Mako Surgical (MAKO) on August 8^th 2011 during the S&P 500 American debt downgrade panic. With today’s panic, that investment is still up 62%. I keep a wish list of stocks I want to own, and today FedEx (FDX) struck my fancy (though Pepsi, UPS, and Disney sure looked hot too).

FedEx dropped 8.17% today. Down 32% from its 52 week high, where it was just three months ago. FedEx hasn’t been this low since October 2003, or  August 2009. A high quality company selling at a bargain basement price, my favorite. This is a Porsche selling for the cost of a Ford. It’s down due to  the temporary problem of the world not buying things because they are afraid.

My investment thesis: People will eventually buy things again and Tom Hanks will be doing the delivering.

Monty