How to Profit from This Week's Panic

I was in a small boat this week, maybe 10 miles off the coast of Sanibel Island, Florida. I was fishing for cobia, grouper, snapper, and anything else we could find along the wrecks and the flotsam...

On our way out, we saw a shrimp boat on the horizon. Often times, you'll find cobia hanging out under shrimp boats, getting easy meals from the shrimp nets, which also snare lots of bait fish.

The shrimp boat we found – Babe – looked like something from the set of an apocalyptic movie. You could tell Babe had once been red, green, white, and brown. But now it was only the calico of rotting wood and decades-old, flaking paint.

Given the condition of the boat, I thought perhaps it had been abandoned. But a hardscrabble, middle-aged man stepped out on deck as we tossed our lines under the shadow of the boat. He had a jet-black mullet haircut and a huge beer belly. "Got any beer?" he shouted over to us.

"Got any shrimp?" our charter captain shouted back.

Normally, fresh "head-on" gulf shrimp costs between $2 and $4 a pound at the dock. A 50-pound bag might cost $100 to $200, depending on the size of the shrimp. But Babe was from Texas and had probably been out shrimping for a few weeks.

Such dire straits created a whole new kind of market pricing. We were the only boat around. We had the only beer available. For one case of beer, the shrimpers would give us 50 pounds of shrimp. The market price of shrimp, under duress, had fallen to about $0.40 per pound.

Sooner or later, Babe will reach the dock. And the market for shrimp will normalize. The same thing will happen with prime mortgages, most of the financial stocks, and the global supply of credit – all of which were crushed this week.

When will it normalize? My bet is by the end of this year. All you need to do is survive long enough to be in the game when that happens.

You can't take the measure of an investor during a bull market. The test of your skills and your mastery over destructive emotions (greed, fear) can only come during a falling market – like right now. The most critical moments are your actions when other investors panic. Can you stand against the crowd? Can you remain calm and still, while others give into their fears? Can you wait to dock before you shout for beer?

Since August of last year, panic has been in the air. Every two months or so, the markets have swooned. Each time the indexes have gone lower, and mortgage-related stocks have been decimated.

We expected some of our readers to panic and throw in the towel. Our subscribers are often a good contrary indicator of the stock market. At market extremes, they tend to become extremely greedy and extremely fearful. I recall during the last big tech boom in 1999, our average gain was something like 85%. And people canceled their subscriptions, saying we hadn't made enough money!

I've been writing investment newsletters for 12 years. Never before in my career has the recommended list in my advisory featured so many super-high quality companies. And though our stocks are not immune to the forces in the market, we've weathered the storm extremely well.

Our portfolio is filled with top-quality, global operating companies, whose intrinsic value will be minimally affected by the mortgage debacle. We'll look back 10 years from now and be amazed at the opportunity to invest in stocks like Intel (INTC) and Anheuser-Busch (BUD) at these prices. Like the shrimp on Babe, the value of these firms is solid in the real market.

I hope you will put your money to work in high-quality businesses like these. And if you are buying now, you're in good company... The truly elite mutual fund managers who regularly hold a high percentage of cash have been buying since late January. For example, David Winters, the manager of the Wintergreen Fund, normally holds about 25% of his portfolio in cash, waiting for great opportunities to buy. He bought heavily in January, reducing the size of his cash stake to only 11%. He told the Wall Street Journal: "It's the gigantic after-Christmas sale."

Marty Whitman's Third Avenue Value fund is down to 10% in cash, from the mid-20s at the end of last year. And Mason Hawkins, the manager of the Longleaf Partners Fund, has moved into a fully invested position. After years and years of having his funds closed to new money, Hawkins sent out letters to fund holders requesting additional capital.

If you buy top-quality companies, you'll be thrilled to own them once the panic subsides. And assuming you've done a reasonable job of diversification, it's very unlikely you'll be scared into trading them for a case of warm beer.

Good investing,

Porter Stansberry