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The Ultimate Stock Strategy for the Coming CorrectionBy
Wednesday, September 26, 2012
If the market drops 10% in the next week, do you know what to do?
If you're like the average investor, chances are good you don't. Chances are good you'll panic and make crazy decisions.
If you're like the average investor, you don't know the greatest stock market wealth strategy on the planet... which I'll tell you about in a moment.
But first, let's talk about the market drop...
If you've been reading DailyWealth this week, you know there are a lot of optimistic people in the market who just bought stocks... There are a lot of crowd followers who have seen the market climb to new highs, so they're jumping onboard.
Times like this often precede sharp market declines. That's just the way the market works. If you're a short-term trader, knowing that a decline is around the corner is important. But if you're following the surest, safest path to stock market wealth, you simply don't care about a correction.
That path is buying the world's best businesses at great prices... and then compounding your way to wealth over many years.
If you're a longtime reader, you know the businesses I'm talking about: blue-chip "World Dominators" like Microsoft and Coca-Cola. These businesses have tremendous advantages over their competitors. They generate huge cash flows, which are directed to shareholders in the form of higher dividends, share buybacks, and rising share prices.
And if you've taken my advice to buy them over the years, a stock market correction is nothing to worry about.
For example, in 2009, I recommended semiconductor giant Intel to my Extreme Value readers. Shares were trading for $15.27 at the time. Since then, Intel has climbed to $22 per share. It has also steadily increased its annual dividend to $0.90 per share. This translates to a dividend yield of 5.8% on our original purchase price.
Now... picture that Intel owner who took his position around $15 per share.
Do you think he cares about a 10% or 20% correction in the stock market? No way. He only cares about those dividend checks that are coming from one of the world's best businesses... which now represent a 5.8% yield (and rising) on his original investment.
That buyer of Intel is comfortable knowing that no matter what the stock market does, the world is still going to use computers. Those computers will need semiconductor chips. He knows all sorts of bad things can happen and he will still receive a safe 5.8% yield on his money. They could even shut the market down for a year, and he'd still get his money.
That's extraordinary peace of mind most investors will never enjoy... because they're obsessed with short-term moves, CNBC videos, and hot tips.
No matter what the day-to-day movements of the market are, World Dominator companies like Intel, Johnson & Johnson, and Coca-Cola will still be No. 1 in their industries. They'll still have giant, insurmountable competitive advantages. They'll still have consistently thick profit margins. They'll still generate huge cash flows. They'll still direct a portion of those cash flows to shareholders through ever-increasing dividends. And they will still allow shareholders to put the power of long-term wealth compounding to work.
To sum up, if you've bought great businesses at great prices over the years, don't worry about a correction. In fact, don't worry about any of the things that plague the average frustrated investor, like elections, the Middle East, or people predicting the end of the world.
Just keep doing what you're doing... And keep up the practice of worry-free compounding with the greatest companies in the world.
If you aren't doing this already, you should be looking forward to the coming correction. You may have the chance to buy the world's best businesses at great prices... and get started on the surest, safest path to stock market wealth.
Good investing,
Dan Ferris
Further Reading:
One of the hardest lessons for investors to learn is also the key to the success of some of the world's best investors. It may shock you... But the wisest, richest investors in the world say you can achieve great investment results without ever thinking about one big issue ever again. It's that simple. Find out what to do here: One Popular Investor Obsession You Should Give Up Right Now.
These companies can start generating long-term wealth for you with one phone call. "In five minutes, you can put one of the universe's most powerful forces to work for you," Dan writes. "You just need to dial that number." Read more here: The One Phone Number Every Investor Needs to Know.
Market NotesTHE MARKETS ARE STILL COMPLACENT… BUT NOT FOR LONG Fans of high volatility may soon have something to cheer about.
The "VIX," a popular gauge of market volatility and investor fear, has been declining for so long, nobody pays much attention to it anymore. It's as though volatility has taken a permanent vacation.
But as longtime readers know, "calm periods of rosy headlines and softly rising prices will always be interrupted by periods of wrenching volatility… and vice versa." And the trend usually changes when no one is looking for it.
That change may be happening now. As today's chart shows, the VIX made a "higher low" last week. This is similar to the action we saw in the Volatility Index back in April – just before it spiked 60% higher in five weeks.
It's too early to say for sure if we're in for a similar move this time around. But as long as the VIX holds above last week's low around 13.70, traders should see an increase in volatility soon…
– Jeff Clark
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