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How to Prosper in the Midst of a Growing Financial Crisis

By Porter Stansberry
Thursday, June 26, 2008

Much to the annoyance of the staff who share the ground floor of our Baltimore office with me, when the stock market has a particularly bad day, I launch iTunes on my computer and play the disco-era hit Stayin' Alive at high volume. 

Over the last 12 months, stocks have fallen by about 11% on average, as measured by the S&P 500. On the other hand, the new recommendations I've made in my investment advisory during that time show a small average gain – about 4% – during the same period. We're stayin' alive – just barely. 

I expected this year would be tough for stocks... Most people simply haven't considered what a huge problem the subprime crisis is because most people don't realize how important the U.S. mortgage market has become to global liquidity. 

Ten years ago, the total U.S. mortgage market was about $3.5 trillion, roughly equal to the U.S. Treasury market. Today, the U.S. Treasury market has grown to $4.5 trillion. But the U.S. mortgage market has more than doubled to about $9.5 trillion. 

These mortgages, packaged into securities guaranteed by Fannie Mae and Freddie Mac, make up the reserves of financial institutions all over the world.

As these securities fall in price, they're reducing the amount of available outstanding credit globally.

I thought the ongoing mortgage debacle would spill over into the general economy and damage almost all asset prices. I've even recommended betting against some of the more vulnerable companies, which could go bankrupt in the next few years.

But... as I wrote in this DailyWealth article three months agothe world's best investors actually look forward to bear markets, markets like the one we are experiencing this year. And after 12 years as an investment analyst, I've learned a very important lesson. 

I shared that lesson in April, and it's worth repeating today: Stock prices can fall farther than anyone can imagine. If you're patient, it's possible to make stupendous profits in stocks, especially if you're willing to buy when no one else will.

My strategy for long-term success in the midst of a bear market is to position my portfolio in progressively higher-quality stocks – companies that dominate their industries and have huge competitive advantages. Normally, dominant companies are far too expensive to be purchased safely. Investors recognize the advantages these elite businesses have, and bid their shares up accordingly.

Judging by the feedback e-mails I've read, I know more than a few investors have sold most of their stocks to wait out the mortgage debacle in cash, on the sidelines. 

That's certainly the safest way to play it. But when I look around the markets and see names like Verizon (VZ), Microsoft (MSFT), and Intel (INTC), selling, in many cases, for less than 10 years' worth of cash from operations, I feel you simply must buy these companies, regardless of how rocky the road might be over the short term. In fact, I'd say if you don't own these stocks, you're not really an investor.

I've used the current market to load my model portfolio with members of America's corporate hall of fame. Buying these legendary corporations at such great prices will ensure you an excellent return over the next five to 10 years – and beyond.

Looking at this portfolio, it's hard to imagine a higher-quality mix of stocks – and most of them are trading at once-in-a-decade low prices. Without the terrible problems in the mortgage and finance sectors, these values wouldn't be available.

And that's why, despite the risk to the market overall, I don't think you should let this bear market scare you. Instead, I recommend you use it to put your cash to work.

Good investing,

Porter Stansberry

Market Notes


This week's biggest stock market winners are the same winners we've been writing about for a long time: Halliburton and National Oilwell Varco – the "oil services."

But how about the stock market's "biggest loser"? Well, you'd be hard-pressed to find a bigger one than the "fat boys" of the interstate – recreational vehicles. Take Winnebago... 

Winnebago is America's largest RV maker. It specializes in the big "Class A" gas guzzlers. Your average car weighs around 3,000 pounds. Class As can weigh more than 20,000 pounds and get less than 10 miles per gallon. These numbers aren't making for brisk business right now...

Like a lot of "landfill stuffers," Winnebago has been hit with a perfect storm of high energy prices, a weak economy, and contracting consumer credit. Sales fell 40% in the most recent quarter, and shares have collapsed. If there is an uglier downtrend in the market, we haven't found it.

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