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When things are looking shaky in the markets (like they are currently), then we need to play a little defense. We do that by pulling some profits, cutting losers, raising cash, and rotating into more defensive stocks like gold and utilities.
Since the beginning of the year, we've certainly played some defense over at Capital Wealth Letter. I've warned (here and here) that I see trouble brewing in the stock market and our economy, warning readers to put stop-losses in place in order to protect profits. We even added more exposure to gold in our portfolio. (I
explained why gold is due for a bullish move here.)
But today I want to touch on the other part of Bryant's quote that is often neglected…
The full quote is "offense wins games… defense wins championships."
The truth is, during difficult times in the market, we can't just focus on our defense. That's important, of course, but our offense also has to be ready. We can't just get scared and batten down the hatches. We need to simultaneously be thinking about our next moves when the dust settles.
Here's the major reason why: The big secret to quickly generating significant returns boils down to investing in major market disconnects.
Why It's Time To Start Looking For Market Disconnects
Market disconnects take place when the price of a given stock or asset class gets "out of sync" with reality. It doesn't happen often… but it does, it gives us a rare opportunity to purchase high-quality investments at rock-bottom prices.
You can bet that in the aftermath of this market chaos there will be some wonderfully lucrative deals. But if you're not prepared ahead of time, you may miss out. Or if you're too focused on defense and you're gripped in fear then, unfortunately, that will also dampen your potential returns.
Disconnects can be found anywhere. Again, these are situations where the value of a security just doesn't match up with the underlying facts.
One of the most recent disconnects that we invested in was in the summer of 2020. That's when one of my favorite businesses went on sale. It was a glaring opportunity, yet the market didn't want anything to do with it...
In August 2020, the S&P 500 had nearly recovered from its devasting losses at the onset of the pandemic. It was the quickest selloff and rebound we have ever witnessed. In just three weeks, the market went from all-time highs to falling off a cliff. Quite literally. It dropped over 30% in a few weeks and bottomed in March 2020.
Yet, by August the market had nearly reversed all those losses, skyrocketing by 45%. Remember, a 30% loss requires a 43% gain just to get back to even.
Despite the market's stellar performance, my favorite industry -- property and casualty (P&C) insurance -- was still more than 20% off its February highs. Here was the chart I showed my premium readers...
There was a disconnect… Granted, it made sense why investors were skeptical. Insurance companies are inherently betting that events like (Covid-19 deaths, rioting, looting, burning of businesses, etc.) won't happen. Especially all at once. But I knew that these things would pass. Insurance companies have endured pandemics and catastrophes before and survived. Plus, looking back, it's easy to see how the auto insurance business in particular could boast some pretty lofty margins. Nobody was driving or getting in wrecks, yet we all still forked over that car insurance premium each and every month.
So I recommended American Financial Group (NYSE: AFG).
I was convinced that this disconnect couldn't last forever. And sure enough, in less than two years that investment has paid off handsomely…
To say we've crushed the market might even be an understatement… I knew the stock would likely outperform the market, but even this topped my expectation.
But that's the power of investing in market disconnects.
Build Your Watchlist Today
When things settle down and we find a market bottom (whenever and wherever that might be), you will want to be ready with a list of your favorite companies that you can begin buying immediately. Or be ready to add to your position if you currently own them.
Kick off your list with best-of-breed companies -- those with consistent revenue growth and generating enormous amounts of free cash flow. You can easily find these line items at sites like Yahoo! Finance under the "Financials" tab after you've typed in the stock's ticker symbol or company name.
Here's a list of world-class companies to help you get started...
- McDonald's (MCD)
- Microsoft (MSFT)
- Walmart (WMT)
- Costco (COST)
- McCormick (MKC)
- Starbucks (SBUX)
- Packaging Corporation of America (PKG)
- Mondelez (Nasdaq: MDLZ)
- Lockheed Martin (LMT)
- Republic Services (RSG)
- Salesforce (CRM)
- Mastercard (MA)
Longtime Capital Wealth Letter subscribers will be familiar with some of these names. That's because they all share traits that make them excellent long-term investments.
To be honest, some of these companies should already be in your portfolio. Don't hesitate to add to those positions when the time is right. I do want to point out, however, that this list should act as a starting point for your own due diligence. I haven't done deep dives on these stocks. Yet...
P.S. In the meantime, my colleague Nathan slaughter has found a small-cap oil outfit operating out in West Texas that is sitting right on top of the largest oil reserve in history…
With enough oil to independently power America for the nest 49 years, you won't see this covered on the nightly news... But some heavy hitters are making making big investments in this area -- and this little-known company stands to profit the most. Go here for details now.
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