The market is going to crash.
Well, sooner or later.
But what happens in a market crash? Are you prepared?
The answer to this simple but important question depends on who you are asking.
The Different Mentality of 3 Types of Investors
For a Short Term Trader long on the markets, the answer is something like “I’m about to be wiped out”.
(FYI if you want to become super wealthy by trading, remember the number of day traders on the Forbes Richest List is…zero)
For a Medium Term Investor (investment horizon of 5 to 6 years), the answer will shift focus to the severity of a market crash instead of focusing on a binary event. After all, a 20% correction is small when you put it into perspective of a 5 year timeframe. That’s because markets can easily move +/- 20-30% in any given 5-6 year timeframe.
You can see exactly what I mean by reading Active Value Investing by Vitaliy Katsenelson.
But if the correction is 2008-2009 recession like, resulting in 50-60% drops, you’ll be underwater for many years before breaking even. And it’s going to be a painful process because a 50% drop means a 100% appreciation is required just to get back to your starting point.
I am Long Term Investor.
A boring, non-glamorous & “lazy” person who invests for decades & not just years.
Because of such long investment time horizons, I prefer to stick with proven businesses paying good dividends; an approach perfected by the likes of Warren Buffett & someone even wealthier than Buffett.
A long term investor’s focus on dividend stocks is very different to short-term and mid term market participants.
I’m laughing when others cry.
I cry when others laugh.
But before giving out the names of 3 stocks you can buy blindfolded in the next market crash, let’s see how a long term dividend investor views a market crash.
How Dividend Investors Beat the Market
What is it about dividend stocks and long term investing that is ridiculed by shorter term investors?
For starters, I get that dividend stocks are considered as defensive stocks.
These are stocks that don’t move up or down a lot. When markets head south and everyone else is panicking about the decline in their portfolio, dividend investors see the market crash as an incredible opportunity to buy quality stocks at distressed valuations.
Mr Market is having a garage sale where he is selling quality stuff along with the junk. The beauty of this ideas is that, quality dividend stocks gives you direct access to the growing cash the company is able to generate.
Let me show you the power of dividends.
It took the market more than 25 years (from 1929 to 1954) to get back to the levels achieved before the 1929 crash.
Now if you include dividends into the picture, the story is different.
In the same 25 year period, a dividend investor would have converted a $1,000 portfolio into $4,310.
An absolute return of 331% or compound annual growth of 6.02% compared to 0% without any dividends.
If you follow the dividend strategy and people laugh at your for holding boring stocks, you’ll the one laughing many decades later. Manage dividend stocks in a tax free account, and you’ll be laughing so hard your stomach hurts.
Boring is beautiful but people are deprived of proper data and perspective. If practiced well, dividend investing is an effective strategy for bear markets.
Easy-To-Use Rules of Thumb to Predict the On Coming Market Crash
But with the market giddy at all time highs, the question is how to determine whether the market will crash soon.
But here are some market crash indicator tips.
Tip #1: People who’ve never shown interest in the markets just want to talk about the stock market.
Examples: moms, your mom’s circle of friends, your wife, your wife’s circle of friends.
The common theme is that these people think it’s so easy to make money in the stock market because they see images like this.
Tip #2: TV business channels or business newspapers proclaim a target for the Dow Jones Industrial Average (INDEXDJX:.DJI) or S&P 500 (INDEXSP:.INX).
These predictions are made by people in the brokering business and make money when people buy stocks. Conflict of interest here.
Tip #3: There is euphoria and a general a sense of over-optimism. Mind you, this euphoria is not backed by adequate growth in underlying earnings or business growth.
Are You Ready For The Coming Market Crash??
What good is an opportunity in hindsight?
You need to have the cash to take advantage of the opportunity.
Cash combined with courage in a crisis is priceless. – Warren Buffett
3 Stocks To Buy Like a Madman in the Coming Market Crash
Starting with as little as three quality dividend stocks is a powerful strategy for long term wealth creation.
As you’ve seen in the numbers, dividends provide income in down and sideways markets. Reinvest those dividends and watch it compound over time.
Here are three solid and proven businesses that I’ll be honored to hold large amounts of in a dividend-focused portfolio.
Dividend Star #1: Johnson & Johnson (JNJ)
I like Johnson & Johnson (NYSE:JNJ) because it’s a recession proof business.
Follow along with the Stock Analysis Software by Old School Value as it’s easy to see fundamental numbers and will give you a better idea behind the numbers.
Looking at the data, it’s easy to see the stability of revenues. Even during tough periods, revenues only dipped 2.9% in 2009. Click the image below to see the full size with the notes.
Dan Myers also wrote how you can tell whether a company has a moat based on consistency of gross margins.
Let’s take a look.
With such a diverse base of products and customers, Johnson & Johnson (NYSE:JNJ) reduces dependencies on any one particular type of product or customer. A 3% drop over 10 years is remarkably strong because in a capital market where margins are strong, you are bound to see competition come up and try to take some of the pie.
I have no hesitation in recommending JNJ in any sort of market crash.
JNJ has continuously increased its dividends for the last 10 years, regardless