One of the worst downturns the US has experienced in recent history was the Great Recession from December 2007 to June 2009. The economic crisis was caused by the collapse of the housing market, which was fueled by low interest rates, cheap lending, poor regulation, and hazardous subprime mortgages. The S&P 500 briefly fell to the apocalyptic value of 666 on March 6, 2009, and reached its closing low of 676 three days later. It was a mess. I remember watching stocks in freefall. Company share prices were getting cheaper daily and investors were starting to panic. The market took big casualties during the period, including investment banks like Lehman Brothers and Bear Stearns. I remember thinking it was bad, but also thought this couldn’t last forever, and I got to work preparing my watch list of stocks I wanted to buy. It was probably the first time I had really methodically gone through companies very carefully knowing that an opportunity was coming, and I wasn’t going to miss it. This is an exercise I continue to practice today.

Market peaks and troughs come in many different disguises. A look at history will tell you this. I get a little tired of commentators comparing what happened “before” to what is happening now. Nothing is ever the same in history and the world changes daily. New investors come along with different habits and market cycles are forever morphing into different forms. What never seems to change are investors’ emotions. This is the one thing you can rely on to drive markets (usually incorrectly) most of the time, something which few commentators ever recognize or speak about. They are usually caught up in it themselves. They are purveyors of bad news. Investors chase quick money as prices rise and flee in fear when they decline on future news flow. Nothing can be further to what you need to be successful. Remember, risk decreases as the market falls as companies become cheaper, it doesn’t increase. It just may seem like the opposite.

Using Your Intuition

I must admit, I have never been at the very top academically — I’ve relied on employing smarter people around me for the detail and it works fine that way — but for years I’ve recognized and developed my natural intuition. Something I inherited from my dearly departed Mom. The ability to acquire knowledge or cognition directly without using clear logic or inference is a valuable attribute and should be harnessed and developed if you are involved in picking stocks. Some may argue with me, but at the end of the day, more art than science goes into investing. It’s challenging to use short-term trading methods to successfully trade without an intuitive understanding of the markets. Intuition is experience built up over time that you put into practice naturally. You should always trust your intuition when it comes to stock picking (or anything else for that matter). If more common sense is applied over analysis, there would be many less loss-making positions. “Paralysis by analysis” is a term that many stock analysts are guilty of. The chance to show their knowledge and skill of analyzing every single detail means they often can’t see the wood for the trees. This is the difference between a Stock Analyst and a Portfolio Manager. The latter usually have more intuition than the former, that’s why frequently good analysts don’t necessarily make good PMs.

I’ve made some great returns on the back of Buffett’s “fearful when others are greedy, and greedy when others are fearful” mantra. After 30+ years in the market, it’s evident that many investors (particularly the smaller ones) are still inclined to buy at the top and sell at the bottom, playing nicely into Buffett’s advice. It’s a sad fact that they are the last ones in and the last ones out historically on every market cycle. If we remain emotional creatures, this isn’t likely to end soon. It seems that people are not all that afraid of taking risks. They are not against risk for a variety of reasons, but they are against losing, and the prospect of losing weighs heavily on their decision.

The Doomsayers Will Say Anything For Headlines

So back to March 2009 and my watch list of names. They were getting fundamentally cheaper by the day and fear was heavily a part of it. In my experience, this is an essential factor of a market bottom. The fear must be extreme, though the trouble is, everyone has a definition of this extreme fear, and it could be now or sometime in the future. Personally, I don’t think we are at that level just yet, but again, it’s just opinion. The right time to buy markets, stocks, or anything to get the best returns is on other people’s distress. It’s the time when the most investors, commentators and even the media become despondent. Social media will be against you. Just know that none of these accounts are responsible or care about your positions. They are after clicks. Bad news sells. The environment will essentially look to be like there is no hope. It’s characterized by the most pain. The investment is well below what you paid for it, the outlook is bad, and the price continues to move against you. You may have bought on the way up or the early markdown phase and you are at the point of just throwing the towel in. What you have to remember is fear moves faster and lasts longer than most ever anticipate, and emotion and investing don’t mix. It’s right here that you have to decide how much risk do you have or are you just looking at your losses? Invest and start with risk, not P&L.

The End Is (Probably Not) Nigh

The trouble is that it all sounds great until cheap stays cheap, and believe me, stocks can stay cheap for a very long time. Or alternatively, your chosen company investment remains a melting iceberg because no one wants to buy it. These can be painful times for an investor, and we’ve all had them and are indeed experiencing them now. It took until the middle of 2013 for the American stock market to fully recover from the fall 2008 stock market crash. It also should be noted that the S&P 500 required more than 12 years to break and sustain the highs hit during the tech boom in 2000 in order to put the move in context. Markets and stocks can stay cheap for a while. Try to pick stocks with a notable catalyst as it could take a while for things to turn around. This is something our firm The Edge specialize in doing.

Opportunistic investors might average down during bear markets. It is the best example of generating future riches. It just won’t seem like it at the time. Every small decrease in the stock market presents an opportunity to purchase at ever-lower prices, increasing your likelihood of a future increase in return. Remember this is a sale but buyers may take their time to clean out the bargains. If you are going to buy, do it slowly and carefully. Lastly, remember, it really isn’t that bad and not the end of the world. It won’t end with the index going to zero. Control that emotion at all costs in times of panic and distress of your positions. One way to do this is to write your investments down and constantly revisit that thesis to see if it still holds. If it does, and your investment is going against you, it’s Mr. Market trying to pickpocket your cash. Usually, sudden emotional decisions have generally been disappointments with investing, and you will end up kicking yourself.

The Trade

I remember distinctly opening up Barron’s one Saturday (as I still do today), and it was full of doom and gloom. However, one thing stood out to me. There was a lead article that was speaking about the market fall and some words stood out to me in all the noise: “The small investor was selling.” I hadn’t really been waiting on this, but call it experience, skill, intuition, judgment, or just pure luck, it was my call to start buying stocks on Monday. In March 2009, I bought some of the best bargains ever in the market. Some were even below their cash current assets. I felt good about it too. I had been ready. Preparation was a big part of it. This one small thing triggered what I knew was right and merely indicated the timing.

In summary, here are your 5 things to remember when trying to recognize a bottoming-out process. This goes for stocks and markets. As I said before, start with the analysis of risk of the position. You’re better set if things don’t initially go the way as planned and you’ll be a winner longer-term controlling your losses.

1. Contrary to popular belief, you can’t learn from history. The market was set up to fool you. I have lived though many cycles and whilst they go up and down, they come in different disguises.
2. Trust your intuition. It will never let you down. Keep a watch list of names you want to buy and associated valuations.
3. At market bottoms, the doomsayers and market commentators will make it seem like the market is going to zero. If you are banking on a quality index like the S&P 500 going there, give up now and go fishing. You’ll have more fun and save a bit of cash. We will all be out of a job.
4. Wealth is created on the way down in the stock market. Accumulate great companies and cheap prices and your bank account will thank you in 3-5 years. Things will seem worst at the point of entry and may take a while to turn around. Patience is a crucial asset. Most investors are their own worst enemies.
5. The small investor will be selling at the bottom. This is the biggest signal of a turn in sentiment. According to the data, 69% to 84% of retail investors lose money in stocks. Ensure this isn’t you.

If you are interested in this type of investing using a catalyst, please contact us at research@edgecgroup.com. We will be happy to chat no matter if you are a large or small investor.

Lastly, if you want to see our ideas live, our 6th Annual Charitable Ideas Conference is on November 17 in NYC at The Penn Club. 100% of donations go toward The Alzheimer’s Association of NYC so it’s a worthy cause and you’ll learn a great deal. Sign up here.