Editor's note: You can make the biggest gains in beaten-down stocks... as long as you're not falling for a "value trap." That's where our colleague Bryan Beach, editor of Stansberry Venture Value, comes in. In this updated piece – which we first published in DailyWealth in January 2021 – he explains the secret that can help you profit when the market gets carried away...
You might have heard about "Mr. Market"...
This allegory comes from Warren Buffett's mentor, Benjamin Graham. In his seminal investing book The Intelligent Investor, Graham likened the stock market to an impetuous neighbor he calls "Mr. Market."
Every minute of every weekday, Mr. Market makes bids to buy the companies you own... and provides quotes to sell you thousands of businesses that you don't own.
But Mr. Market is capricious. And thanks to his shifting moods – as I'll show you today – you can make a lot of money by hunting for stocks in the bargain bin...
As Buffett – Benjamin Graham's star pupil – elaborated on "Mr. Market" in his 1987 letter to Berkshire Hathaway shareholders:
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business... At other times he is depressed and can see nothing but trouble ahead for both the business and the world...
The more manic-depressive his behavior, the better for you.
Many people don't understand that the stock market isn't some code to be cracked or system to be beaten... It's really just common sense. Mr. Market is always there, ready to make you an offer.
Most of the time, his offers are reasonable and fair. But when he makes a stupid or irrational offer to buy or to sell, you should take him up on it. Otherwise, just ignore him... After all, you know full well he'll be back again the next day.
After a 10-year raging bull market, there just aren't many value companies lying around... And even the bear market's arrival hasn't undone the entirety of those gains. The no-brainers are gone. Anything remotely close comes with "hair" on it.
Fortunately, I've never been afraid of a little hair. One of my favorite value setups is when a good company's shares fall for a reason that is not related to the underlying fundamentals of its business. Businesses can go on sale for any number of reasons.
I've covered a lot of those reasons over the years...
For instance, one-time solvable problems – like the temporary cost overruns that plagued a single project for HVAC contractor Limbach (LMB) – can be a source of temporary market opportunity. I recommended Limbach to our Stansberry Venture Value subscribers in December 2018. Within three months, shares had doubled, and we were able to lock in some gains.
Investors may also overreact to the macro trends they see taking place. For example, in September 2019, Mr. Market had a panic attack and decided that nobody would ever buy a house again using a human realtor...
As a result, the market cap of traditional realtor Realogy (RLGY) – known today as Anywhere Real Estate (HOUS) – slid from $2 billion in early 2019 all the way into small-cap territory. We scooped up shares after they had fallen from about $13 per share to just $6... And we sold for a quick 70% profit just two months later.
It doesn't take much to give Mr. Market a good scare. And as you can see below, these kinds of value situations make for interesting, bowl-shaped charts. Take a look at what happened to the stocks I mentioned...
We don't time all our "bowl" shapes perfectly, but we don't have to in order to make fantastic gains... In Venture Value, we sold LMB at a 43% gain and RLGY at 71%.
In short, when the market hands you a fantastic value, it's simple: You want to be ready to buy.
By buying at the bottom of the "value bowl," you're betting that Mr. Market will go back to paying what he used to pay for solid, established businesses... And that's a great bet to make.
Editor's note: Right now, one group of stocks is trading at the LOWEST prices we've seen since the 2008 financial crisis. That's thanks to what Bryan calls market "blind spots"... a series of misconceptions that can hide incredible moneymaking opportunities from the majority of investors. And now is the perfect time to act – while no one is paying attention – for the potential to double or triple your money in as little as 18 months... Get the full story here.
"Scared investors tend to pull money out of the market at the worst possible times," Brett Eversole says. A huge amount of cash is on the sidelines today. That means Mr. Market is incredibly fearful. But this situation won't last... Learn more here.
"Last month's banking crisis created a rare panic in the markets," Brett writes. The financial system's stress levels spiked as a result. Based on history, though, that swift disruption could already be paving the way for a buying opportunity... Read more here.