A Historically Bad 2008–But What Will 2009 Bring?

December 18, 2008

On Tuesday, the Federal Reserve impressed Wall Street and the world by cutting interest rates to nearly nothing. The central bank said that its new target for the Fed Funds rate will be a range between 0% and 0.25%. This makes it the 10th rate cut in the past 15 months! And as dramatic as the interest rate cut was, what really got Wall Street excited was the Fed’s policy statement that said that the Fed would use “all available tools” to help the economy.

With only eight trading days left in 2008, the last year will most certainly be one of the worst years for the stock market since the Great Depression. Traders will undoubtedly be talking about “those crazy days of ’08” for decades to come. While I’m not going to try to sugarcoat the last 12 months, I need you to understand that the New Year will bring an entire new market. Just as 2008 was brutal for investors, 2009 may very well generate historic returns!

Five Investing Trends for 2009

That’s why this week, I want to shake off 2008 and give you my list of “Five Investing Trends for 2009.” These are the key elements of a successful investment strategy for the next 12 months.

1. If You Wait for the Rebound, You’ll Be Too Late: The first and most important point is that this is the best buying opportunity of our lifetimes.  Thanks to the massive selloffs of this fall, valuations are ridiculous right now, and there are many bargains to be had. Bloomberg reported last week that 2,267 companies around the world are trading for less than their cash value! Even if we do see another “retest” of the lows, being fully invested now is the way to go. Think of it this way—if I told you your investments would drop by as much as 10% in the next few weeks but rally as much as 50% in the next few years, would you jump in the market? Unless you’re an ultra short-term trader, your answer should be yes! By the time the market feels “safe,” most stocks will have already seen an initial surge that investors will miss out on if they’re on the sidelines.

2. Don’t Just Test the Waters—Be Fully Invested: Similarly, all of the variables have come into place to launch a powerful and sustained bull market. The amount of cash investors have pulled out of the market in the past year is staggering, and these reserves total 50% of the current market’s value! There have only been three times in my career where the level of uninvested capital has been over 20%—in the bear markets of 1982, in 1991 and in 2003. All three times, the cash flooded back in force and resulted in a sustained rally.

• In 1982, cash was at 28%, and the resulting rally lasted for 18 years. 
• In 1991, cash was barely over 20%. My Emerging Growth Buy List was up more than 80% that year!
• In 2003, cash was at 27%, and my Emerging Growth Buy List saw returns of more than 35% for the year!

Clearly, there is good reason to think the same will happen this time around. To make the most of this rally, you need to be fully invested.

3: Only Invest in Fundamentally Superior Stocks: But before you start throwing money around, you need to do your homework. Only fundamentally superior stocks will make the most of this rally, while weaker stocks will only track the market or lag behind. Whenever investors get nervous, they naturally gravitate towards higher-quality stocks with growing earnings and sales—precisely the types of stocks we own in Emerging Growth. Over the next 12 months, stocks that excel in critical areas like return-on-equity, sales and earnings growth, and analyst revisions will earn the lion’s share of the market gains.