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“Be Greedy When Others Are Fearful”

Jeff Remsburg

As the markets continue to bleed, one InvestorPlace analyst is seeing opportunity, and making a new recommendation today

As I write mid-day on Thursday, U.S. stocks have extended losses after another trading halt this morning.

The Dow is down nearly 9% with the S&P and Nasdaq not too far behind.

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But you know who is feeling it worse?

Small-cap stock investors.

The Russell 2000, which is an index tracking 2,000 small-cap stocks, is down almost 11% as I write.

Below you can see the S&P is down about 25% since late last month. But as rough as that is, it’s still better than IWM, which is the iShares Russell 2000 ETF, a proxy for the small-cap stock sector. It’s down over 32%.

But this exaggerated small-cap pain isn’t limited to just the last few weeks …

Over the past three years, small-cap returns have lagged those of large caps by almost 7% per year. Over the past five years, that shortfall narrows but it’s still 4% per year.

But if we pull back even more, we see a different picture.

Below, we go all the way back to 2009, coming out of the lows of the Financial Crisis. As you can see, IWM (small caps) have posted 308% returns compared to the S&P’s 285% returns.

But this long-term small-cap outperformance isn’t the point (I include it merely to show you that large-cap stocks don’t always outperform).

Look again at the chart, noting the far-greater volatility of small-cap stocks. While they fall more than the S&P in challenging markets, they soar far higher in strong markets.

Illustrating this, the results of a study from 1979 through 2018 found that the standard deviation of monthly returns of small-cap stocks was 18% greater than large cap stocks.

So, when you invest in small caps, you have to be prepared for greater volatility. But if you can handle that volatility, then the payoff can be extraordinary.

***The problem is most investors can’t handle the pain

Dalbar Inc. is a company that studies investor behavior and their market returns. What Dalbar has found is that the average investor woefully underperforms the broad market.

To illustrate, take the 20 years that ended on 12/31/2015. Over that time, the S&P 500 averaged 9.85% a year.

And how’d the average investor perform?

Only 5.19%.

Let’s put some actual numbers on this. Lots of times, percentages tend to mask how real dollars feel.

If you’d put $100,000 into the — let’s call it the “average investor index” — back in 1995 and let it compound at the aforementioned 5.19%. Twenty years later, you’d have amassed $275,099.

Not bad.

But let’s now say you’d invested that same $100,000 into a market index fund, then let it compound at 9.85%.

That would have turned into $654,638 — nearly 140% greater than the returns of the average investor.

So, why does the average investor underperform so dramatically?

Perhaps the biggest reason is because he buys and sells emotionally, which often means he’s making the wrong decision at the worst possible time.

Take right now — if you’re concentrated in small-cap stocks, which are down 32%, how would you feel knowing you’re doing way worse than the market?

How would you feel looking at the knife-edge chart below (IWM), having no idea how much further it will drop?

Factor in the reality that most of us face — an endless stream of bills and expenses with limited savings — and this starts feeling scary fast … leading to a panicked sale.

That’s what drives the underperformance documented in the Dalbar study.

Now, do you want to know the easiest way to override our self-defeating emotions, get far-better investment returns, and defy the Dalbar results?

Stop relying on emotions, and start using a numbers-based market approach.


***This is what famed investor, Louis Navellier, has done

Louis has always been a math and data guy.

When he was a grad student at Cal State Hayward some 40 years ago, his professor gave him an assignment that would change his investing trajectory: Create a model that would mimic the S&P 500.

The professor wanted to prove that indexing was the best way to invest. Using Wells Fargo’s powerful mainframe computers, Louis completed the assignment — but there was a problem …

His model beat the S&P.

He’s been using a quantitative system ever since.

Now, independent of how a numbers-approach to the markets finds elite stocks that outperform, this type of system offers a second benefit — an impartial entry and exit system that bypasses emotions.

From Louis:

If there’s one thing I always emphasize to my readers, it’s the importance of a good stock-picking system.

Why? Because if we rely on our own instincts, they can lead us to make some really silly decisions. Human biases can torpedo your investment performance — so, they’re best avoided or minimized.

That’s the goal of a whole area of research called behavioral finance. Through an enormous amount of experimentation, psychologists and economics have attempted to answer the age-old questions:

Why do we hold onto losing stocks when our rationale for buying the stocks is gone?

Why do we sell winning stocks way too quickly?

Why do we resist making smart financial moves when we can easily see how beneficial they will be?

Why do we act so crazy with money?

***The reality is that with a quantitative market approach, now — in the midst of this brutal selloff — is a great time to be looking for elite small caps trading at discounted prices

Now, to be clear, I’m not suggesting you run out and begin buying blindly, as we don’t know how much further these losses will extend.

That said, opportunities are developing. The question is will you be too afraid to look for (or act on) them?

It was famed investor, Warren Buffett who said it’s wise to be “fearful when others are greedy and greedy when others are fearful.”

That’s what a quantitative system helps you do — push through fear to act on great opportunities.

The reality is the Russell 2000 is trading at far better valuations than the S&P right now. To illustrate, even before this morning’s brutal selloff, the Russell was trading at 6.6-times cash flow, with a price-sales ratio of just 1x.

Meanwhile, the S&P 500 was trading at 11.9-times cash flow and a price-sales ratio of 2x.

So, even right there, small caps are presenting a better long-term investing set-up. But it gets better.

When using a system like Louis’, you don’t invest in any old small-cap. Instead, you focus on a select subset, characterized by top-tier fundamentals.

In Breakthrough Stocks, Louis applies a codified set of numbers-based rules — based on fundamental strength — that identify which specific, elite small-caps to buy, when to buy them, how long to hold, and when to sell in order to lock in profits.

This is the same system that enabled Louis to find Hansen Natural (now Monster Beverage (MNST), that climbed from $3.96 to $40 before Louis’ subscribers took profits.

The system also found Google in 2005, and Nvidia in 2016, and tipped Louis off on selling Cisco and Sun Microsystems in 2000, while other investors held on and lost big.

It turns out, the system has identified its next potential multi-bagger small-cap in the recent market turmoil. And just today, Louis has recommended it to his Breakthrough Stocks subscribers.

From Louis:

It’s in a sector that has proved very successful before: semiconductors. Most importantly, this particular stock shows all the signs of continued growth and dividends.

Stepping back, how do you handle market volatility like this? Do you turn and run, or see it for what it is — an opportunity to find elite stocks at discounted prices?

Investors tend to have it backwards a lot of times. As Cullen Roche said, “The stock market is the only market where things go on sale and all the customers run out of the store.”

If you’re tempted to run out of the store right now, I’d encourage you to click here to learn how a quantitative system like Louis’ can help — especially when applied to small-cap stocks.

Have a good evening,

Jeff Remsburg

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