The Biggest Investing Opportunity of Your Life

Over the past 10 to 15 years, it's fair to say that when it comes to financial markets, we've had it fairly easy. In the past 10 years, the earnings of the S&P 500 have roughly doubled, and the price has tripled. The highest federal funds rate we've seen before what's happening right now was just 2.5. So, it's been a good time for businesses and investors. Money has been cheap to access, which has made it easy for businesses to expand, valuations to grow, and investors to make money.

At the end of 2019, it seemed like anything you bought was doubling fast. But then, of course, the bubble burst. The pandemic threw the world into chaos; businesses shut, and the financial markets collapsed. The recession was long and dark, and the investing world was brought to its knees. Yeah, right. In reality, the central banks of the world stepped in, printed trillions of dollars, gave it to businesses and consumers, and simply kicked the can down the road. But now we've caught up to the can, and with inflation at basically 40-year highs, the game of printing money to save us can no longer work.

The Federal Reserve, as we've seen, has now been raising interest rates sharply, restricting citizens' and businesses' ability to access money, thus putting the brakes on the economy. And to put things lightly, it's caused the financial markets a bit of a headache. Cryptocurrencies have been destroyed, real estate is falling, big-name companies are now struggling, and the stock market is looking pretty shaky. Investors are selling up with fears that the deep recession we had to have is now finally here.

But despite all that's happened so far and all that will happen over the next year or two, this could actually be the best time of your entire life to get ahead and build your wealth. So let's talk about why right now is such a big opportunity and how you can use it to your advantage.

People should not own stocks at all because they just get too upset with price fluctuations. If you're going to do dumb things because your stock goes down, you shouldn't own a stock at all. There's a lot of psychology in investing, a lot more than people realize. Of course, the simple idea of investing is to buy low and sell high, but in reality, most people do the exact opposite. They buy high, and then they sell low. I mean, they don't mean to do this, but when times get tough, the fear, the uncertainty, the doubt, it just scares them out of the market.

But as people like Warren Buffett, Charlie Munger, Monish Pabrai, Guy Spier, Phil Town, and all these others would say, when the market is down heavily, that's the best time to invest. The lower the entry point, the better. Listen to this: We're a net buyer of stocks over time, and who wouldn't rather buy at a lower price than at a higher price? People are really strange on that. I mean, most people—most your listeners—are savers, and they should want the stock market to go down. They should want to buy at a lower price, but they got that feeling that they just feel better when stocks are going up. It's a really interesting phenomenon.

The main thing that causes this backward psychology is that most people don't have clear investing goals, and they haven't committed themselves to a long-term investing time horizon. So when the news gets bad and the recession hits, instead of seizing this big opportunity, they simply run away from the possibility of short-term pain. But that, in reality, is a terrible strategy.

Have a look at this. This is a history of U.S. Bull and Bear Markets since 1926. The bull markets are in blue, the bear markets are in orange, and the recessions are the great out bars. In that time since 1926, there were 15 recessions and 11 bear markets—12 if you add in the 2020 drop. The bear markets lasted for 14.7 years total, and to go with that, you have 75.4 years where the market was in a bull run. Think about that: these scary “the world is ending” events happen very infrequently.

And as you can see, if you have the stomach to go against the grain and invest during these periods, you're often very well rewarded. Just take a look at these returns coming out of the Great Depression. You made 265 percent across 4.4 years. After the next bear market, you made 43 percent in 1.8 years, 210 percent in 4.1 years, 908 percent across 14.8 years, and the trend goes on.

I love this chart that Tony Robbins put in his book "Unshakable." If you were the guy or gal that put your money where your mouth was at the lowest point of each of the biggest bear markets in recent history, this is what you would have returned just 12 months later: 20, 30, 40, 50. Now, while it's impossible to perfectly pick the market bottom, and in reality, you likely won't get exactly those returns, it does show you just how big of an opportunity a bear market can be.

For example, if you invested at the peak of the market before the 2020 COVID drop, you would have made about 9 percent on your money. But if you decided to invest at the market low, which was just a few weeks later, then you would be up around 60 percent. That's how much of a difference your entry point can make. And remember from the chart before, these big drops are very infrequent: 14.7 years of bear markets and 75.4 years of bull runs. These moments to stomach some pain for long-term gain are actually really rare.

Okay, makes sense, recessions are big opportunities. But how can I actually seize this opportunity as an investor without making some massive mistake? Well, step one is to keep up to speed with what's going on in the market, so you know when these opportunities are out there. And then step two is to execute your strategy correctly, whether it be passive or active investing. We'll talk about that in a second. But one resource that will definitely help you stay up to speed with what's going on in the market is Seeking Alpha, the sponsor of today's video.

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So back to the video: Step One is definitely to keep yourself updated, but critically, Step Two is to then execute your investment strategy correctly. When you see the turmoil in the markets, as we know, there are two main ways to go about long-term investing. There's either dollar-cost averaging, or there's Warren Buffett-style long-term value investing.

And for most people, you know, they're going to choose the former—they're going to choose dollar-cost averaging. For those that don't know what dollar-cost averaging is, it's very simple: taking your money and diversifying it across the whole stock market via something like an index fund. SPY, for example, is the classic S&P 500 Index Fund, and it's the largest index fund in the whole world.

So they choose a market-tracking investment, and then from there, investors will invest the same amount into that market-tracking investment at regular time intervals. So like $2,000 every six months or something like that. And your money, through that index fund, is split across the whole market. So this strategy really is designed to take all of the emotion out of investing, but it still gives you the reward of the market's long-term performance, which is about 10% annually for the S&P 500.

But you obviously don't have to do any of the fretting about your investments, reading annual reports, anything like that. And of course, at face value, this strategy doesn't sound as though you're timing the market and specifically taking advantage of the amazing opportunity that is a stock market crash, but actually you are. Because here's the thing: when the stock market is very high, that $2,000 isn't going to buy you as many shares. On the 9th of October 2007, $2,000 bought you 12.78 SPY shares, but one year later, as the market was plummeting, you $2,000 bought you 20.5 shares.

It's genius! Naturally, you're going to buy a stack more shares when the price is lower and much less when it's higher. But you haven't had to change anything about your investing habits. So I really like dollar-cost averaging, and that's the very real way that passive investors seize the opportunity that is a big market crash simply by doing what they've always done.

But beyond passive investing, many investors do like to have greater control over their portfolios and opt more for a Warren Buffett-style approach of buying individual companies they understand that have strong competitive advantages, they have talented management teams, and of course they're at margin of safety prices. Now I'm not going to go over that whole strategy in this video, as that would take quite a long time—in fact, it would take about eight hours because that is exactly the subject of "Introduction to Stock Analysis," which you can watch over on Profitable through the link in the description.

If you would like, but one thing I did want to touch on in this video is how those active investors can ensure they won't get screwed when investing in this turbulent economic time. The first thing we have to think about is, well, what's actually going on right now that is causing businesses to suffer?

And right now, the main problems are high inflation and rising interest rates, which then means costs are higher, debt is more expensive to service, and consumers are spending less. So how can you be confident that a business will be able to cope through an environment like that?

Well, firstly, the business you're looking at needs to have pricing power. We've spoken about this lately. Pricing power means they've achieved a competitive position where they can raise prices and suffer no drop in sales. For example, right now, many businesses are having to cut back on their prices because consumers are spending less on discretionary items. But on the other hand, businesses like Coca-Cola have such strong competitive advantages they're able to raise prices without suffering a large drop in sales.

In fact, in Q2, they increased their drink sales by eight percent and their concentrate sales by four percent despite cranking up prices, and this characteristic is crucial to success during an inflationary period. As Coca-Cola's costs rise, they can easily pass on those costs to customers, and they themselves suffer no ill effects. So that's the main characteristic that combats inflation.

But the other big factor to consider right now is the rising interest rates. And of course, the main consequence of rising interest rates is that rolling over debt becomes more expensive. So, the best way to ensure that your business holds up well during this time is to ensure they have minimal debts. For example, Google has more cash than they have debt; their debt to equity ratio is just 0.05—tiny. They earn more interest than they pay.

Meta is even better; they have no debt at all. As Peter Lynch would say, it's very hard to go out of business if you don't owe anything to anyone. So, low or no debt is essential. And then finally, a more general consideration is simply thinking about the business model. Ask yourself: does this business model hold up well in turbulent economic times?

For example, grocery stores typically outperform in recessions because obviously, people can't stop buying the essentials. Insurance companies—people aren't going to stop paying for house or car insurance just because you know they're a little bit tighter for cash. But on the flip side, as rates rise and consumers have less to spend, you know travel companies might suffer; holiday plans might be thrown out the window as the cost of living eats up more discretionary income.

So there are multiple factors to consider, but for active investors, it's worth thinking about business models, pricing power, and debt levels. And then for passive investors, just keep on keeping on, stay strong, and go long. But overall, guys, that is why recessions present such big opportunities. Hopefully, this video arms you with the knowledge to take full advantage.

Also, before I sign off, please remember to check out that deal from Seeking Alpha if you are interested. I would really appreciate it. And hey, it's a great resource at a very good price. But overall, guys, thank you very much for watching! Definitely leave a like on the video if you made it all the way through to the end. And with that said, guys, I'll see you all in the next video.