Anthony Speciale Stock Market Analyst

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What It Means to “Love the Down”

As I told you last week, fortunes are born in bad markets. If you want to make money in the stock market, you must learn to love the down.

Sometimes buying a top in the market works, and sometimes it doesn’t. But if you buy high quality companies with the right time frame, when the market is down 20%-25%, it always works.

With the market about 3% off its recent highs, everyone has a prediction about where it’ll go next, whether it’ll bounce back or go lower, etc. But the truth is that I don’t know where the market will go next, and no one else does either.

Inflation is still very much a concern, but when you look at bonds, they’re showing that they’re more worried about a slowdown in the economy. And that brings up some fears about “stagflation” like we saw back in the 1970s, which was decidedly not good for stock prices.

I expect that we’ll see a lot of headlines about this over the next few weeks, and we’ll likely see the fear and greed cycles shift very quickly.

So, what can we do with this, and what does it mean to “love the down”?

Learn to Love the Down

Well, down days are buying opportunities. While others are scared of down periods in the market, you need to fight off the fear, stay rational and start looking around.

For example, take a look at what company insiders are doing. Last week, particularly in small banks, they were buying quite aggressively when the markets fell.

We also saw institutional buying. In bad market cycles, I pay close attention to deep value investors as well as activist investors. They’re the ones that are usually the absolute best at spotting undervalued companies with the potential to rebound and get you massive returns.

You also want to look around some of the hottest sectors or trends, as down markets allow you to buy into those names at better prices. That’s when you need to be pushing forward and taking advantage of it.

Learning to love the down is why Warren Buffett went from a millionaire to a multi-billionaire and one of the richest people in the world. When his Berkshire Hathaway got so big that it could no longer properly use some of the deep value techniques, he became a bear market buyer.

Most of his best buys took place during some corporate or broader market crisis, and Buffett became a billionaire because he learned to love the down.

And think about this… In most aspects of our life, if we see a sale or a discount on something we want, we jump on it. But we don’t do that in the stock market! Instead, many of us panic when prices drop.

Now, I want to tell you about my favorite bear market strategy. It’s aggressive, but it makes eye-popping sums of money.

Rational Liquidation Value

I have a formula that I call “Rational Liquidation Value,” which takes into account a rational estimate of the value of the company’s assets, plus cash and securities, etc. Then, we subtract everything they owe.

If that number is higher than the market capitalization, then I say that the company is trading for less than my calculation of its Rational Liquidation Value. This works through most market cycles, but it works best coming out of a bear market.

They often call the 2000-2010 period “a lost decade” because the S&P went nowhere over that time.

But coming through and out of the tech bubble, this strategy of buying stocks below Rational Liquidation Value, would have actually compounded your money at about 30% a year, and every $1,000 in this strategy would now be worth $30,000.

So when you see the markets down 15%, 20% or 25%, make sure you check back here because I’m going to be talking about stocks trading below their Rational Liquidation Value…

And there’s going to be an opportunity for you to earn a massive return on your money while everyone else is panicking.