Get Your Greedy Lion's Share During a Crisis

8/7/15

Be Greedy When Others Are Fearful

I’m going to stretch the bounds of your imagination and intellect today by taking an analogy from one of my childhood favorite Disney movies, and applying one of its lessons to the subject of money and wealth… then give you a few examples of how you can apply it.

If you’re well-read in finance, even somewhat engaged, or even if you’ve never read anything about money or investing outside of the pages of my sarcastic and sometimes rude, but insightful little financial blog, you should know that herds of people doing the same thing at once, especially in the world of investing, eventually leads to someone getting trampled to death—in fact, usually, lots of people.

So, here’s a pop quiz: can you name for me the Disney movie where the best-known stampede takes place? You guessed it—the Lion King.

If you’re not familiar with the story, there’s a lion prince named Simba whose papa, Mufasa, rules the Pride Lands of the Serengeti. Mufasa’s brother, Scar, wants to be king, so he puts himself into the good graces and trust of Simba, then orchestrates a scenario—a stampede—wherein Mufasa is killed, and makes Simba appear to be at fault for it. Simba, thinking he has caused the death of his father, flees the kingly crisis to live in relative isolation and oblivion to his troubles in a tropical paradise, while Scar takes over the kingdom with his vicious packs of hyenas, subsequently leading to the drought and ravaging of the once-beautiful Pride Lands.

The pivotal moment of the movie is Simba’s fleeing the devastation of the stampede to wallow in sorrow, abandon all hope, and live where nothing reminds him of his troubled past, instead of accepting his fate, seeing his opportunity to rule and triumph, and live happily ever after.

I won’t go any more into the plot of the movie since everyone’s seen it. What I want to point out is Simba’s perspective on the crisis he was in.

There are two ways to face crises—we can run from them, with the hoard of fools around us, frantically scared and getting trampled in the process, with no hope of ever recovering.

Or we can face the crisis head-on, pick up the pieces after the dust settles (while everyone else is still hiding under rocks), see the opportunity for improvement down the road, buy into the situation, and prosper.

Be the Crisis Winner, Not the Loser

We see crises all the time in the world of finance. As individual investors who don’t get trampled by thundering herds on the Serengeti of Wall Street, we should live for crises.

The depressing truth is that the average individual investor loses money in the long term. His major source of market insight is MSNBC, which he watches, takes note of the stocks which the talking heads are promoting, and buys into companies which are “hot” right now… the ones which have already made their money for the quarter, and whose prices have nowhere to go but down. 

This type of armchair investor doesn’t buy a stock or try anything new until things are so hot, that his friends, neighbors, and even his grandma are into it.

By then, it’s too late. The money’s been made, and the “smart” money is getting out.

If I was standing on the street and saw a car falling from the sky, I’d get out of the way. After all, with something as bizarre as seeing a car fall from the sky, I’d be certain something was seriously wrong. But cars don’t fall from the sky often, so there’s no reason for me to run for my life and hide in a cave twenty miles away.

That’s what standard investors do. They watch the news, and when the crap hits the fan, they run like hell. Then, they wait until they see others regrouping for some action.

Some give up after losing just a bit of money, because they are scared out of their wits that another crisis is just around the corner.

The troubles of the average investor don’t start on the eve of the crisis--they start when that investor bought into an investment at the wrong price, and for the wrong reasons.

Let me tell you a simple truth about falling cars: they’re usually full of money, waiting to be picked up once the dust settles. Approach the projectile vehicle intelligently, carefully, diligently, and pick up your bag when the time looks right.

Good old Uncle Scar, despite his despicable, murderous disposition, teaches us a good lesson about opportunism, which we would be wise to learn.

He knows how to profit from a crisis (that fact that he created it is irrelevant at this point). And, the world’s best investors, men like Warren Buffet, follow the same suit. They see crises as opportunities, not as times to flee for the hills and bug out.

Things get cheap during a crisis. Stock prices plummet, commodities often take huge hits, companies go bankrupt, and people lose their jobs. We shouldn’t rejoice at the sorrows of others—but we do need to learn from them, so it doesn’t happen to us.

We pick up things of real value when they’re “on the cheap”—at fire sale (or at least, garage sale) prices. Learning to see value in an irrational world of frantic people, and taking advantage of others’ irrationality, is a key to being a good investor.

We take advantage of opportunities others miss, or are too afraid to try because of things they heard on TV, the radio, Facebook, Twitter, or from their quirky brother-in-law, who really might not have any idea what he’s talking about.

I never have to worry about my investments. That’s because I choose solid businesses to invest in, buy at good prices, collect dividends, and use unconventional methods which are guaranteed to provide me with an income stream, regardless of whether the market goes, up, down, or nowhere over the next year or two—or even if it plummets.

Electric-car manufacturer Tesla is a great example of a company to avoid for anyone who considers himself to be a true value investor. Last August, this bad boy was the darling of Wall Street. The talking heads couldn’t stop talking about it. It was all “BUY BUY BUY”. Elon Musk was on the news everyday talking about the debut of his innovative Model S car.

I won’t argue with his brand and company being innovative. I will argue that his company isn’t a safe investment. With negative cash flows, limited sales in a niche market for only rich people, and a faddish, expensive technology, Tesla is a disaster in the making for anyone going “all-in.”

The fact that the CEO authorized the company to sell a few billion dollars’ worth of convertible bonds last year at its all-time market high indicates an inner lack of faith in the upward mobility of the stock price. Investors caught on, and prices dropped by 30%. Swings like that are killers for investors.

Sure, if you can catch the right whip-saw moment for Tesla’s stock price, you’ll make some money. 

But if you’re the Green Guy on the graph below, and you buy when Trish Regan and MSNBC loves it, you’re not going to be too happy after you lose a third of your money over the course of a few months.

Tesla’s recently (within just two weeks) down about 14% off its recent high. It lost $184 million in the second quarter of this year, and $45 million the quarter before.

The company has never turned a profit, despite being exceptionally popular with Wall Street, the White House, and individual investors for some perverse reason.

I wrote a short piece back in February about Tesla, lamenting the woes of investors who speculate (read: gamble) with lots of money on companies like this. To do so is absolute absurdity. Don’t do it.

Rather, take the advice of your friendly, neighborhood Village Leader, who leads you down the paths of safety, security, and sound sleep.

I’ve been in a situation where I was up every night worrying about my investments. I’ll never be there again. It’s not the way to live.

Let’s pick some healthy, safe stocks, and ride out the last breaths of this bull market until the next crisis appears for us.

Get Greedy During the Coming Collapse

So, what is this crisis that may be upon us soon?

As you might have heard, the Federal Reserve will most likely make some sort of rate change in September. What does this mean? For one, your savings account will earn like 0.15% more or something (big whoop), and any loans you get will also likely be more expensive, interest- rate wise (but not a whole lot).

I don’t believe the Fed will raise interest rates substantially for probably another year or so. It finds itself between a rock and a hard place. It has been saying for a year now, since QE ended, that it wanted to keep rates low for a while to give the economy time to adjust, for wages to rise, for the QE-infused debt to slowly adjust economic conditions. Once that happens, it will begin to slowly raise rates.

The problem is, there has been no real economic expansion. Growth is stagnant, wages are stagnant, and business profits/earnings are the result of “financial engineering” and share buybacks.

So should it begin to raise rates anyway? They can’t stay low forever. The problem is, raising rates will constrict investors, businesses, and individuals from borrowing money, which is a supposedly a catalyst for more economic expansion. If rates are raised quickly, borrowing will dry up, and the housing market may stagnate (housing is a huge driver of economic growth). The resulting stagnation may cause the stock market to take a big dip, and we might end up in another recession soon down the road. Then that will lead us back to lowered rates again, more stock market and commodity bubbles, etc…. a very UNVIRTUOUS cycle.

Such a cycle will prove to the world that six years of monetary intervention by the Fed has been a colossal failure—akin to driving nails into its own coffin.

Will rising rates be the catalyst for a crisis starting in September? I don’t know for sure. But I do know that if there is, I will have my plate filled the brim with recommendations for you on how you can load up on the good stuff, bank some serious coin, and make profits while everyone else is running for the financial hills.

Meanwhile, I remain cautiously bullish about this market (I think stocks could still go up a bit from here). There hasn’t been a market correction in over 970 or so trading days. That’s a freaking record! There’s been no rational normalization of prices for too long for this to last much longer. I give it six months, tops. So I’m continuing to hold safe stocks long-term, collecting income on my stocks in the form of covered calls, and cash-secured puts, share buybacks, and dividends, and waiting patiently for my long-awaited correction to begin.

If you have no idea what "covered calls" are, get an introduction by checking out this article I wrote about options here. Then, you'll be better prepared for what I have next.

I promised you a few ideas, so here they are.

If I had more cash sitting on the sidelines, I’d like to do the following:

• I’d buy another couple hundred shares of Intel (INTC), and sell a couple of $29 call option contracts expiring on August 28. One contract will give you an overnight cash dividend into your account (the option premium) of $56. A short three-week trade on this bad boy will give you 1.18%, or 19.28% annualized. Market-beating returns!
• Buy 100 shares of Coca-Cola (KO), and sell the September 11, 2015 $42 call option. You’ll get an overnight dividend into your account of $56, plus the quarterly dividend…. So you’ll make about 17.61% in annualized income. Not too shabby!
• Buy 100 shares of Cisco (CSCO), at around $28.15 today. Sell the August 28, 2015 $29 Call option and get an instant dividend of $49 into your account. You’ll make a minimum of 1% in three weeks on this trade, and up to 3.65%, (64% annualized!) depending on the stock’s price on the expiry date.

These are awesome, safe trades. Because the market is a little more volatile today, option prices are a bit more thick and juicy as well. It works best to sell options on more volatile days, since volatility affects the prices of options in a very positive way for us as sellers.

There you have it! Is a crisis upon us? We shall see. I don't think seriously bad will happen right away, but either way, The Village is set up to help you make money no matter the situation.

If this sounds good to you, take action NOW.... and be sure to SHARE this article with your friends! And follow my antics on Twitter, Facebook, and LinkedIn!

As always, live long, and invest your stash of cash.

Jeremiah