By Paul Mampilly
The market has been nasty this week. Stocks were down sharply around the globe and investors were understandably nervous. The broad-market indexes have been negative since the start of the year and investors just want to protect their gains. Advisers and talking heads are shouting “get out.”
But I want to offer up a different point of view that you might find a little shocking. In fact, I want to offer the same advice I gave a fellow traveler just a couple weeks ago.
“Buy stocks,” I said.
The woman clutched her Prada handbag as her blue eyes popped. “Seriously?”
“Yes, seriously,” I said. We were both waiting for our flight to Atlanta from West Palm Beach Airport.
You see, when people find out I’m an investment guru, the No. 1 question that I’m asked is: “What should I be doing with my money?”.
I get this question all the time. And when the stock markets have been incredibly volatile, people are desperate to know what a genuine expert with decades of market experience thinks.
This nice woman at West Palm Beach Airport was shocked when I told her to buy stocks. “My financial adviser says that the stock market is going to crash,” she said. She had been told the same thing that many people have been hearing — China, rising interest rates, oil price crash, debt.
No disrespect to this nice lady, but she didn’t understand the one thing that really matters when it comes to making money in the stock market.
And it’s mind-blowing that so few people don’t understand this one thing. Because if you don’t understand it, you’ve got zero chance to make money in the stock market as an active investor.
So, what’s the one thing you need to know to make money in the stock market as an active investor?
When you invest in a stock, you have to buy it because of something that’s going to happen in the future.
In other words, you’re anticipating something that’s not yet happened. The key events that I’m looking at are:
- Earnings, sales and fundamental growth when a company reports its quarterly results are better than what people were expecting.
- Buyouts, which are usually only known when announced.
- Surprise new product introductions, such as Apple’s introduction of the iPhone.
- Government approval of new drugs.
- Release of new scientific evidence, which can have a large impact on biotech companies.
- Macroeconomic events such as interest rates, economic growth and currency rates.
Let’s go back to the nice lady with the Prada handbag so you understand how to use what I’ve just told you. You see, all the stuff she threw back at me when I said “buy stocks” — China, interest rates, oil price crash, debt — that’s all old news and old news is worthless. You know it. I know it. Everyone else knows it. Investors who are selling because of the old news have already sold.
There is zero reward and zero return coming to you if you’re trading on old news. Bupkis.
To make money in 2016, you need to anticipate what is going to happen in the next six to 12 months.
Strip Away the Chatter
You want to know how to figure out what is going to happen in the next six to 12 months?
Use alien from Mars analysis.
This technique helps you tune out all the junk analysis. Imagine you’re an alien from Mars. Simply look at the facts, clearly and objectively.
When you look at the world in this way … you’ll see that the conditions are ripe for an economic boom in the United States.
First, interest rates are near an all-time low. That means it’s cheaper than ever for first-time homebuyers to step in and buy their first house. And that’s exactly what you’ve been seeing recently.
“Much of this year’s growth has indeed been powered by first-time buyers and particularly millennial first-time buyers,” says Realtor.com Chief Economist Jonathan Smoke. His analysis shows that nearly 35% of all mortgages in 2015 were by 25- to 34-year-olds.
Second, gasoline prices are close to 15-year lows. In some states, you can fill your gas tank for nearly $1 a gallon, while the national average sits at $1.72 per gallon according to GasBuddy.com, down 50% from peaks around $3.50 in August 2014. If you were spending $100 in gas per month, it’s costing you about $50 to fill your tank today. That’s like getting a raise of $600 a year if you drive a car.
That might seem like small potatoes to you, but 76% of Americans live paycheck to paycheck. An extra $600 is a lot of money to most people in our country.
Third, if you look at the most recent data, it shows that the number of people moving into the middle class has jumped by 50% around the world. 50%! If you are a business owner, that means billions of new consumers around the world who want to buy stuff — everything from cars, homes, electronic gadgets, etc. For a company that’s selling anything, there are more people than ever in human history who can buy your product.
You have to understand that these three things are incredibly bullish for stocks, because it means that consumers and businesses are going to have more money to spend. More money to spend means higher sales and earnings for companies.
Taking Advantage of the Next Boom in Stocks
Investors aren’t anticipating higher sales and earnings for businesses because they’ve been scared out of their wits by stories about the oil price crash, China, interest rates, debt, etc. In fact, since July 1, 2015, investors have been accumulating cash, with Merrill Lynch estimating $208 billion flowing into cash money market funds.
Now, when the good news about companies’ sales and earnings arrives, investors are going to bid stock prices higher because they want to own a piece of these fast-growing businesses.
“Now is the time to be buying, not sitting in cash. But most investors are not contrarians. They like to buy when they see momentum to the upside,” said Ed Yardeni. Ed is one of the few investment strategists on Wall Street who gets things right. I know this because he used to come and chat when I was managing money on Wall Street. He advised big investors for more than 30 years at a host of Wall Street firms and now is an adviser to big hedge funds and global banks as president of his own advisory company.
How can you benefit from investors jumping back into the market?
Buy the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA). This exchange-traded fund is going to give you exposure to the broad market. As companies report rising sales and earnings in 2016, investors are going to want exposure to the stocks in the Dow Jones Industrial Average. When they come to do this, they are going to make the price soar higher. You only benefit if you own it before investors rush back in.
Now is the time for you to make money!