4 Practical Strategies You Can Use to Invest in a Bloody Market

By Chika

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Last Updated: May 17, 2022

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18th-century British nobleman, banker, politician, and member of the Rothschild banking dynasty, Baron de Rothschild, is credited with the quote,

 "The time to buy is when there's blood in the streets, even if the blood is your own."

The worse things seem in the market, the better the opportunities are for profit.

Rothschild amassed a fortune buying up properties in the panic that followed the Battle of Waterloo against Napoleon. His statement and action epitomizes the tenets of contrarian investing

The litmus test for such a statement couldn't have come at a better time. Presently there is a lot of blood in the street. Stocks are coming under pressure due to concerns about the Federal Reserve’s pullback of easy monetary policies as it combats the recent bout of high inflation.

 

Consumer prices have risen at a faster pace than economists had expected. 

This fueled more worries that the central bank will raise interest rates at an aggressive pace, which is bad news for stocks.

 

Benchmark 10-year U.S. Treasury yields hit their highest levels since November 2018.

This has sparked a sell-off in the market, with major indexes falling to their lowest levels in recent times. 

 

The S&P 500 has already hit a new 52-week low, while the Nasdaq has fallen to its lowest level since November 2020. About half of the stocks in the S&P 500 are 50% below their 52-week high, with 62% trading below their 200-day SMA

By all indications, we are in the initial stages of a bear market and there are no signs that the sell-off will abate as the Fed ramps up its fight against inflation. The blood on the street presents an opportunity to buy.

But how does one summon the courage to buy in such a market, let alone avoid catching a falling knife? Let's explore some strategies below.

What is Market Sentiment? How to Use Greed & Fear to Make Better Investing Decisions

 

 

4 Strategies to Buy in a Bloody Market

1. The majority is not always right

What is right is not always trendy and what is fashionable is not always right.

As Warren Buffett states," if everyone agrees with your investment decision, it's probably not a good one".

Trendy investment ideas are usually short-termed. They are driven by people's greed and do not take a long-term perspective. Because they are short-termed, interest in the stock fizzles out, and the crowd goes over to the next one. 

The price action of meme stocks is a perfect illustration of how chasing popular trends does not end well. After hitting astronomical price levels, stocks such as GameStop, AMC, and Bed Bath & Beyond have tumbled, wiping off most of the gains made during the retail short squeeze in the early part of 2021.

Going opposite of the crowd exposes you to hidden opportunities to score extraordinary gains.

 

2. Buy when everyone is selling

Buying when there is blood on the streets is simply adhering to basic economics.

When supply exceeds demand, prices would come down - and vice versa. Given that everyone seems to be unloading their stocks to seek safety in bonds or cash, this has flooded the market with shares at a cheap rate.

This is a buyer's market and you are currently in a position to cherry-pick high stocks based on prices. Buying when the market is high and trying to sell during the lows can never be profitable for investors.

 

3. Buy even your blood

The second part of Baron's quote, "even if the blood is your own", is usually overlooked. This statement encapsulates the tenets of contrarian investing. It means having the courage enough in your analysis to buy stocks you already own even when the market is telling you your analysis is wrong.

However, such courage to stick to your investment thesis should not be hinged on the sentiments or opinions of experts. This is a call for due diligence to be conducted before choosing any stock. This brings us to the next point:

 

4. Stick to fundamentals

If you look at the stock market history, you can find that the market always gives opportunities to purchase shares at a lower price. However, most people miss out on these opportunities to buy good-quality stocks with sound fundamentals

This present sell-off in the market has shown that investors have lost patience with high-flying stocks that have no profit or cash flow. The companies which were pandemic winners or had blockbuster IPOs are seeing their stock prices plummet by as much as 50% from a year ago.

The current sentiment in the market has shown us that the stocks which would be viable investments are those that can show a profit, cash flow, or pay regular dividends to investors. This is where fundamental analysis comes in.

By perusing the financial statements and looking at the macroeconomic conditions that affect a company, you can be able to pick good companies to invest in. These would be the winners in the long term. Chasing after trendy stocks is a recipe for compounding losses. 

This lesson is encapsulated in Warren Buffett's stake in Washington Post Co., during the 1973-'74 bear market, which allowed Warren Buffett to amass a stake in the Washington Post Co. 

Buffett stated that the company's shares were trading at a deep discount, as evidenced by the fact that the Washington Post could have "sold its assets to any one of 10 buyers for not less than $400 million, probably appreciably more."

Meanwhile, the stock market had an $80m market cap on the company. Buffett's investment in the Washington Post has increased by more than 100 times the purchase price i.e. before dividends are included. 

 

The Bottom Line on Investing in a Bloody Market

Successful contrarian investors have a common trait — letting the market bring the deals to them, rather than chasing after them.

Most people only want winners in their portfolios, but as Warren Buffett warned,

"You pay a very high price in the stock market for a cheery consensus."

In other words, if everyone agrees with your investment decision, it's probably not a good one.

When there is a huge sell-off, it does not imply that the world is coming to an end, as the media and financial experts are wont to advise us. The stock market has shown resilience times without number. Its ability to bounce back from the pandemic, recession, and bear markets are testament to that fact. 

The market operates in cycles, and in each phase of the cycle, you have to know the best approach to implement. While everyone scampers for safety, the savvy investors are snapping up stocks for cheap and taking positions before the herd returns from its migration. 

Photo by suzukii xingfu

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