Bill Cara’s Blog: March 20, 2017
  • March 20, 2017 01:29 pm
  • by Bill Cara

What Stocks to Buy – After the Crash!

It’s quite possible – probable is more likely – that the stock market will not “crash” this year. In fact, a sudden drop of say 20-25% within a week has occurred very few times. There were occurrences in the 1930s and one in mid-October 1987, and perhaps a couple other times, but I cannot recall them when broad market prices collapsed as quickly.

If I cannot remember them, then I wonder how many people in the world can? You see; what’s important to me as a professional investor is likely not at all important to most people.

But for the sake of discussion, let’s say that a stock market crash does happen. Before I get into my thinking, I’d like to tell you something I learned many years ago. I had a close friend who, as a consultant to Apple, was fortunate to have a new computer model of theirs be shipped around the world with a free general purpose app that was his. Almost a million Apple users were exposed to his work.

One day that friend asked me what I thought was the favorite hobby or general interest of most people in the world. I thought it would be the stock market. “No”, he said, “I didn’t ask what interests you the most. Think gardening.” “Well”, I replied, “that would not have been in my top ten.” When I thought more about it, I had to admit that together with golf, gardening was my Dad’s favorite interest, and yet he was a day trader too, trading his stocks on an old IBM ThinkPad with a dial-up phone line from the country.

What I learned that day from my friend is that understanding what is important to most people is key to serving them.

Earlier today I remembered that moment from my past as I was in a discussion about what do investors and traders of capital market prices really want. I think they – professional investors as well as self-managed account traders — want to know if the market is going to crash and what they can do to recover if they get caught. After all, the current bull market run has eclipsed any other in my memory.

Yes, prices have run to extremely high levels, particularly since November 8, the US election day, and we know that bull markets don’t go forever. It is a fact that what goes up will come down – maybe not revert to the base, but always to something analysts refer to as the mean. Trends and cycles do exist.

But, I’m not here today to discuss statistics. I want to simply talk common sense. What stocks should we buy — after a crash?

On the day of the crash and the days following it, I know the public would still be still buying smart phones, cars, and homes, drinking beer, wine and soft drinks, watching movies and TV, using credit cards and bank services, investing in real estate, travelling, and so forth. Maybe not so much, but daily life would go on – just like in cities that had been overwhelmed in times of war. Humans are a resilient species and we do have routines.

After all, a capital market price is just a price. If there is a substantial discount to recent high prices, there will be buyers. If the corporations behind the stock prices are clearly sustainable – meaning that they have the financial strength and the revenue and earnings power to recover a serious economic downturn or financial crisis better than competing companies – then I know that value-seeking traders of securities will turn to those particular stock prices to buy the new supply being offered by sellers.

I venture to say that if the stock prices of the most sustainable corporations were to drop suddenly by 20 to 25 percent from 12-month highs, they would go on in the following 24-36 months to be 25 to 30 percent higher.

If so, that result would clearly out-perform the historical long-term performance of equity markets, which underscores the point Owen Williams made in his report last week, which was that investors buy risk as the only way to out-perform markets.

If you agree with my thinking, then you might also agree that the each one in the following list of companies are going to be around for another five to ten years at least following the stock market crash, and so within the next bull market cycle their reduced stock prices would most likely grow to be much higher than cost.

I certainly was not trying to make the list complete – I included only 24 companies and only for the US and Canadian market — so I’m certain you can add others to the list.

General Motors

Ford

Toyota

Marriott Hotels

Carnival Cruise

Royal Caribbean Cruise

United Continental Airlines

Delta Airlines

American Airlines

JP Morgan

Bank of America

Goldman Sachs

Royal Bank of Canada

Toronto-Dominion Bank

Disney

Apple

Google

Microsoft

Amazon

Intel

Cisco

Verizon

AT&T

Boeing

These 24 came to mind as quickly as I wrote the blog, but it says all that needs to be said.

It’s the thinking of many people today that they are the smartest ones in the room that usually gets in the way of common sense. If capital markets do unfortunately crash, it’s best to not over-think the matter or else you will be struck with a condition known as “in extremis” – which means you panic and freeze, and common sense will elude you.

Keep it simple, and, like all things in nature, your boat will rise with the next flood tide. Understand that we all have needs, that there will always be corporations meeting our needs, and there will always be a capital market where investors continue to meet the needs of those enduring corporations.

/Bill


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