Bear Markets Create Millionaires

by FI Fighter on January 15, 2016

in Real Estate Thoughts, Stock Investing Thoughts, Thoughts

bear - 1

At this stage of the game, I still believe that it is way too early to declare that we are officially in a “bear market” (even though a sh!t ton of data would support that). Nevertheless, the continued market selloff into this week has spooked a lot of investors… And rightfully so.

I’ve always believed that what goes up must come crashing back down… at some point. There is always a reversion back to the mean, and markets don’t go up or down in straight lines forever…

For the life of me, I will never be able to understand how anyone can be a permabull or permabear… The only thing that I am is a permarealist!

And I know this much — Anyone who wants to become financially independent very early in life (before 35) and a millionaire needs to relish brutal bear markets.

As great as a bull run feels, fortunes are in fact made by “buying low and selling high”.

How do you suppose you “buy low”?

Well, quite frankly, you need a bear market to be able to do that…

Buying the Dips

Most everyone has been conditioned to “buy the dips”… In a rising bull market, this strategy works brilliantly. At the start of a bear market, it’s probably the worst thing that you can do…

Catching a falling knife…

That’s not how you amass fortunes!

Yes, it’s true that I’ve been catching a ton of falling knives with my gold trade, but I would argue that my strategy there is totally different from the conventional approach…

In theory, gold should be anti-correlated to the rest of the markets, and even though that isn’t evident at this moment in time, when the fear becomes paramount, I’m convinced that it will decouple from the broader markets…

Not only that, but the fact that I’ve been dollar cost averaging (DCA) into an asset class that was already down 80% to 90% off its most recent highs before I got in gives me full conviction that a reversion back to the mean can only be found in the upward direction, which can’t be said for the S&P 500.

You want to “buy the dips”? Find an investment that is absolutely hated and in liquidation… Seldom does the popular narrative ever work out for the retail investor…

Hoarding Cash

Anyone who was out of index funds and hoarding cash last year was criticized for being a total idiot… As the argument goes, “Cash doesn’t earn any interest… I want my money working hard for me all the time!

If you are a permarealist, you will understand that the game of investing isn’t always about generating the most offense… Sometimes, it’s far more lucrative to fixate entirely on shoring up the defense.

Yes, cash doesn’t earn you anything… but it doesn’t lose you anything either!

Inflation does erode away cash, sure, but that doesn’t happen overnight! It is asinine to assume that a prudent investor who is parking their cash on the sidelines is “stupid” enough to never convert it back into assets such as stocks, or real estate.

That is NEVER the intention when someone elects to go majority, or all cash!

Just look back to the financial crisis of 2008… When stocks and real estate were crashing down, who do you think came out ahead the most? The buyers who had ample cash and could snatch up all the cheap merchandise for pennies on the dollar!

I experienced a market crash very early on in my investing career… I also lucked out and was able to start buying aggressively at, or close to the bottom… I gotta say, NOTHING beats shopping at the lows when no one else is interested! You literally have ZERO competition out there!

And let me tell you, it is VERY POSSIBLE to go from ZERO to HERO in the span of one market cycle… I literally went from having a net worth of $0 to over $1,000,000 in eight years (2008-2015)… Many investors who I know did far better than me.

Lately, I’ve been spending a good amount of time interviewing other freedom fighters. What’s the common theme that I’ve noticed? Everyone who has achieved financial freedom (or is on the cusp of it) amassed a great bulk of their wealth by buying at the depths of a brutal bear market…

The popular narrative will always be to “dollar cost average” and to “stop trying to time the markets”… “Let time in the market be your best ally”…

Yes, those strategies will work for the average retail investor looking to retire comfortably at age 65.

But if you want early FI, you’re gonna need to do a little better than that!

Having once before experienced the potency of buying at the depths of a brutal bear market, I do know for certain that I will be able to achieve perpetual financial freedom if I am ever granted that same wonderful opportunity again (I’m pretty close now).

There’s a good reason why almost everyone I know is cash strong right now… One of my investment buddies has over $300k ready to go! He desperately wants to buy into Class A rental properties… on his terms! At the rate things are going, he might just get his wish…

I can’t say that my tune is much different from that… I’ve got over $120k just waiting for a willing partner to tango with.

But I’m not out chasing for pennies… The retail crowds can have these minuscule dips…

 

When foreclosures, REOs, short-sales become a “dime a dozen” again, it is only then that I’ll know it’s time to start actively looking for deals again.

 

I’m trying to amass my second million…

 

And you really need a brutal bear market to be able to do that…

 

Fight On!

{ 15 comments… read them below or add one }

1 Financial SamuraiNo Gravatar January 15, 2016 at 10:19 am

The good times seem to have come to an end. Liquidity is key!

I definitely wouldn’t quit your job now.

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2 FI FighterNo Gravatar January 15, 2016 at 10:32 am

Sam,

You got that right… Sadly, yeah you need a W-2 to be able to get loans…

Or I could quit and go hunting for commercial apartments! 🙂

Cheers!

Reply

3 JTNo Gravatar January 15, 2016 at 10:46 am

Liked the article! I am really considering hoarding some cash away since I have been the victim of trying to catch the “falling knife.” 300k/120k cash would be AMAZING to have on standby. I’d be happy to get to 10k. Have a great weekend!

JT

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4 FI FighterNo Gravatar January 15, 2016 at 5:13 pm

JT,

Thanks! $10k can do a lot for you in a downmarket, so don’t underestimate the value of every last dollar you can save.

Back in 2009, I don’t even think I had that much in my bank account… I just kept working hard and saving every paycheck so that I could buy investments.

Get greedy at the bottom! Unfortunately, contrary to popular belief, we are still a loooooooong ways from there.

At best, we are reaching the end of pregame warmups.

Take care!

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5 My Dividend PipelineNo Gravatar January 15, 2016 at 12:15 pm

FI Fighter,

Right now, I have a ton of cash on the sidelines as well. I sold 90% of my stocks last Oct-Nov after going through a divorce. I’m certainly not a market timer, but am happy to be sitting on 85% cash right now. I just recently started nibbling my way back into the market and would love to have a 2000-2002 multi year bear market. It gave many opportunities to build positions. The 2009 bottom was deeper, but seemed to rebound off the lows much faster. In any event, let the bargain shopping begin!

MDP

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6 FI FighterNo Gravatar January 15, 2016 at 5:16 pm

MDP,

Sorry to hear about that, but I read your post and you’ve got a great attitude towards everything, life in general.

You’re also looking incredibly smart right now by having access to a lot of dry powder.

This time around, I don’t expect a “blink and you missed it” 2009 bottom… This has the makings of something a lot more painful and longer duration.

Buckle up, but enjoy the ride my friend!

Cheers!

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7 No Nonsense LandlordNo Gravatar January 15, 2016 at 5:04 pm

The issue with gold is that we are in a deflationary spiral. Despite all the money governments have printed, prices are still falling.

My portfolio/NW went from a small sum in 2008 to a solid sum with multiple properties paid off. When a property is paid off, you can lock in the return of the previous underlying mortgage. While 5.5% is not a big return, when you have a solid 7 figure amount in it, it is a decent sum.

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8 FI FighterNo Gravatar January 15, 2016 at 5:22 pm

Eric,

Yeah, I hear you… But it makes sense, right? There’s no way central banks and the Fed can have the price of gold shooting off to the moon… That would cause a panic of epic proportions with everyone rushing to the exits…

Gold doesn’t trade freely and most everyone knows that… But outside of USD, it’s doing exceptionally well in all other currencies…

In the short-term, I agree that USD will keep strengthening because money has to flow somewhere, and when people panic the de facto safe haven is the USD, the world’s reserve currency. Not gold.

However, the USD cannot stay strong forever… For sure, I am calling the Fed’s bluff and once the terrible earnings reports roll in, I doubt that they will continue to tighten the belt like they want us to believe that they will. And like you said, with all the money printing, it’s illogical that gold should go down in value. Gold has been the ultimate store of value for centuries because it cannot be debased and printed to oblivion… You want more, you gotta go dig it up outta the ground (and that ain’t cheap…).

So, I think it’s just a matter of time… Once the USD weakens (may take a few years) and if QE 4 commences, look out!

Gold is just about due to end its 4/5 year bear market, just as the equity markets finally come back to reality.

Since I can’t time markets with pinpoint precision, I’m hedged in USD and gold. And I like those odds.

Cheers!

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9 JonNo Gravatar January 16, 2016 at 2:05 am

How have gold and mining stocks performed in the last two bear markets? I think down along with everything else…

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10 FI FighterNo Gravatar January 16, 2016 at 9:22 am

Jon,

In the last crash, there was a mad rush for liquidity so everything sold off, including gold stocks… However, by Nov/Dec, gold stocks were already back on an upward trajectory… But last time around, in 2008, gold mining stocks were already in the middle of a massive bull rally that began in 2002… Those stocks were not cheap like they are today, where we are now in the midst of a brutal 4+ year bear market. So, they were crashing down from much greater heights… Not saying it won’t happen again, but the impact from these levels can’t be as severe.

As it pertains to the physical spot price of gold/silver, those went down as well in 2008, but premiums went up, so in essence it was a wash… Even if silver fell to $8/oz, there was no one selling it for $8/oz… The spot price really didn’t mean anything…

What will happen the next time around? I wish I knew… It might be a mad rush to liquidate everything again, or a more slow and gradual decline… Since there’s no way for me to know, I like to hedge with: cash, gold, and gold mining stocks.

For all we know, the markets can go on to recover like they did in October, or this could really be the start of something more disastrous… time will tell.

So, in the short-term and without the benefit of hindsight, I’m just going to do what I did throughout the financial crisis — dollar cost average into my favorite positions at what I already deem are extremely cheap prices. At one point in time, my Roth IRA and 401k were down 60%… In the end, I more than doubled my money on each.

I have no problems with DCA into assets that are already in liquidation; Even with real estate, I was buying on the way up in 2012/2013, and I still made a fortune…

Plain and simple, I love buying up cheap assets…

If you would prefer to wait it out until there is more clarity, hold cash.

Take care!

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11 JonNo Gravatar January 16, 2016 at 10:42 am

My tenuous plan is to sink 50% of my cash into mining stocks, and then when the S&P or ftse falls 30-40% from peak, shift into blue chip dividend yielding stocks. My worry is that the timing doesn’t work out. Would I be better holding cash and waiting for markets to crash, or are miners countercyclical enough to make this plan work. I’m not sure… I suppose no one is!

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12 FI FighterNo Gravatar January 17, 2016 at 8:02 pm

Jon,

If timing was easy to do, we’d all be retired many years ago! 😉

The reality is, your guess is as good as anyone else’s… And there are no guarantees that any of the major indices will indeed fall off by 30% or 40%… Although at this point, those odds definitely look possible…

In general, my own belief is that market crashes don’t happen overnight and there will be ample time to DCA back into your preferred assets. In the last crash, the recovery was very rapid, but I just can’t see that happening again… But even in 2009, real estate stayed down in the dumps until about 2012… even in the best of locations.

The swap from mining stocks into other assets? I have no clue at all how/if that timing will play out… but that’s kind of my plan, anyway.

Cheers!

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13 Income SurferNo Gravatar January 16, 2016 at 5:43 am

Completely agree on the need for cash Fighter. We have 65%-70% of our portfolio in cash right now. I’ve made a few purchases lately, like Union Pacific’s stock, but by in large we are waiting for better opportunities. I look a lot of criticism from readers over the past 18 months…..and I was early….but I WASN’T trying to time the market, I just didn’t see a whole lot that I thought was worth buying. Hoping that changes soon.
-Bryan

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14 FI FighterNo Gravatar January 16, 2016 at 9:33 am

Bryan,

It is absolutely impossible to time the markets… We just do the best that we can and try and buy up whatever assets we think are fairly valued or undervalued… It’s a shame that you have to take flak for your investment decisions b/c it’s not like anyone out there is able to buy/trade with pinpoint precision, never making a mistake.

It’s far too easy to throw stones at other people…

Just keep on doing what you think is best! Of course, I love the idea of holding cash right now… The USD is your best friend and getting stronger by the day.

As an example:

1 USD = 1.4536 CAD

I’m not gonna look a gift horse in the mouth… If it keeps on giving, I’m just gonna shut up and keep on taking.

Cheers!

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15 BeSmartRichNo Gravatar January 18, 2016 at 1:24 pm

I just started building cash position lately. Quite frankly, I am very jealous at all the US income earners as our Canadian dollar has been hammered really hard lately. There are so many bargains in Canada and the bargains will get greater.
Cash is the king now in this bear market.

Cheers!

BeSmartRich

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