With these rough market conditions, many are opting to stay in larger cash positions. While not everybody can take on the same risk and it is the “safe choice”, could you actually be leaving money on the table?
We need to face the facts. Those that succeed in the financial markets take the risk when nobody else is willing to, but what if we could somehow limit that risk, while still potentially making the great returns? It is pretty obvious that the best opportunities for returns come from a previous down market. We can look at the history to prove this.
While I am by no means declaring a bottom, there is still a simple way to profit from these type of market conditions.
Invest in “best of breed” stocks
Sure it is easy to say, but in fact it is also a pretty simple thing to do. It only requires for someone to have the guts to trigger the trade.
When these bearish markets come around, they tend to take everything within site down with it as well. Constantly certain stocks are getting unnecessarily oversold, and we refer to them as “best of breeds“. No matter what sector you look at, there will be bad companies and good companies. Because the bad companies outnumber the good ones, all stocks must get beaten down; however, those good companies or “best of breeds” WILL work themselves back up.
For a quick example, we can look at the financials. A sector nobody wants to touch, yet if we did some research we could of profited heavily. If you take a look at the TWI Fund, then you will see that I added Bank of America (BAC) back in July when it was at $19. Now I am excited to say that the stock sits at $37! And they said we couldn’t profit from the financials.
There are indeed many other companies that are beginning to shine in this horrible economy. Look at JP Morgan (JPM) and Johnson and Johnson (JNJ) to name a few. All these stocks were hit, but no matter the conditions all markets will correct themeselves and the “best of breeds” will shine.
Many people probably missed out because they weren’t aware. How can we determine a “best of breed” from not. It usually takes research and experience to determine the difference. Generally you want to look for stocks that have been tested. They have been around other rough periods. Most of the times you can just overview a company’s facts and you will get an idea of how strong the books really are.
Hey, if you want to stay in cash that is fine. Not everybody can take on the same amount of risk and that is understandable. At the same time, those that sit on the sideline won’t get a chance to flourish, and now you are potentially leaving easy money on the table.