The market has been a bloodbath so far this year — the S&P 500 is already down 8% in 2016, the most ever to start a year.
Friday was especially brutal as the DOW fell 537 points before closing down a wicked 390 points. The Nasdaq closed down 126.59 points, or 2.74 percent.
U.S. stocks headed for their lowest levels in 15 months.
It ain’t pretty…
But I don’t panic during big market corrections, I simply pick a few of my favorite stocks and buy them at a discount.
As Warren Buffet once said, “If you’re buying groceries, you like it when prices go down next week. And you like it if they go down further the next week. Just as we like getting a good deal on the items at the grocery store we would be buying anyway, we should also be fans of getting a good deal on our favorite companies.”
Here’s how two investing legends made a fortune after market corrections…
On Oct. 19, 1987, the stock market suffered what we now call Black Monday. The Dow Jones Industrial Average lost 508 points — almost a quarter of its value — in one day. That is the worst single-session percentage drop in history.
Most people were running for the hills. Some analysts thought this would be the death of the stock market for years to come. Long story short, ordinary investors were selling off their portfolios at massive losses.
But one visionary knew the Baron Rothschild quote, “Buy when there is blood in the streets… even if it’s your own.”
John Templeton — billionaire founder of the famous Templeton Funds — played it cool. He didn’t sell… he bought like crazy. Here’s how Templeton’s Black Monday unfolded…
You see, Templeton was a man of habit, and on Black Monday, he left his office around noon for his daily practice of exercise, lunch, and studying. When he returned to the office, there was a full-blown panic going on.
When told of the massive market crash, Templeton quietly pondered the moment and, according to one colleague, said, “The bad news is we’re in a bear market. The good news is it’s almost over. Let’s find stocks to buy.”
It was that simple. That’s because he stuck to his 16 rules of investing. Rule number 10 bears repeating here:
RULE 10: Don’t Panic
Sometimes you won’t have sold when everyone else is buying, and you’ll be caught in a market crash such as we had in 1987. There you are, facing a 15% loss in a single day. Maybe more.
Don’t rush to sell the next day. The time to sell is before the crash, not after. Instead, study your portfolio. If you didn’t own these stocks now, would you buy them after the market crash? Chances are you would. So the only reason to sell them is to buy other, more attractive stocks. If you can’t find more attractive stocks, hold on to what you have.
Templeton believed in buying solid stocks at the time of “maximum pessimism.” That way, you can lock in discounted stocks you would have liked to buy anyway but thought they were too expensive. It sounds incredibly simple… but it’s hard to swallow when all you see is panic and chaos. You just have to stick to your guns and think long term. It also helps to avoid the screaming headlines in The Wall Street Journal and the exploding heads on cable television.
Another famed investor — Warren Buffett — is no stranger to crash investing either. Here’s how the Oracle played the 1987 crash…
After the 1987 crash, instead of liquidating his positions at a huge loss, Buffett did what he does best: value investing.
He started loading up on Coca-Cola shares. Here’s a recap from a Buffett biography:
In 1988, he started buying up Coca-Cola stock like an addict. His old neighbor, now the President of Coca-Cola, noticed someone was loading up on shares and became concerned. After researching the transactions, he noticed the trades were being placed from the Midwest. He immediately thought of Buffett, whom he called.
Warren confessed to being the culprit and requested they don’t speak of it until he was legally required to disclose his holdings at the 5% threshold. Within a few months, Berkshire owned 7% of the company, or $1.02 billion dollars worth of stock. Within three years, Buffett’s Coca-Cola stock would be more than the entire value of Berkshire when he made the investment.
You don’t make returns like that by buying at the top. Crisis investing is one true mark of a seasoned, successful investor. Don’t panic… profit.
So what should you be looking at right now? Oil stocks…
Oil stocks have been absolutely hammered. Just look at how much some of the biggest companies dropped on Friday:
Oasis Petroleum (NYSE: OAS) lost 16.12% and is sitting at 52-week lows.
Encana Corp. (NYSE: ECA) dropped 10% and is also sitting at 52-week lows.
Marathon Oil (NYSE: MRO) also dropped 10% and is sitting at 52-week lows.
Anadarko Petroleum (NYSE: APC) shed almost 9% and is sitting at 52-week lows.
All of these companies are trading at a serious discount and you can bet that they’ll see a serious recovery when oil prices go back up — which they most certainly will eventually.
So stay calm, this too shall pass. But don’t pass up the opportunity to pad some of your favorite positions while they’re cheap. Buy low, sell high.
Sometimes it’s just that easy.
