Take Advantage of the Economic Cycle

  • The Intelligent Investor takes advantage of the Economic Cycle as opposed to becoming a victim of it.

Cycles of Financial CrisisSource: www.historyshots.com

 

The Economic Cycle is a roller coaster.

It goes up and down,

and up and down,

and down and up,

and up, up, up, and down.

Be excited when the roller coaster goes down. Be afraid when it is going up.

 

"We simply attempt to be fearful when others are greedy and to be greedy when others are fearful."

- Warren Buffett

 

Enjoy Economic Collapses

The Intelligent Investor makes the most money when the economy crashes. That is when everything is cheap. Over the years, we culminate our thinking to be excited when the Stock Market plunges. The harder the economy falls, the happier we are. Stock Market bubbles is when we create a shopping list. It is when the Intelligent Investor goes on a shopping spree.

During recessions, the P/E Ratio of many stocks are in their teens. Stocks are cheap. P/E Ratios are less than 20. We are especially interested in stocks of companies with a Durable Competitive Advantage. The Intelligent Investor buys stocks with low P/E Ratios to get more "Bizzaz" for their "Bizazzle".

 

Equation 1

Buy stock of companies with a Durable Competitive Advantage when their P/E Ratio is less than 15.

P/E Ratio of a Company with a Durable Competitive Advantage

 

Example 1

Wells Fargo, a company with a Durable Competitive Advantage had extremely low P/E Ratio of 9, during the Financial Crisis of 2009. During this time, their stock price was trading between $24 and $27 dollars.

Year: 2011
Company: Wells Fargo & Company
P/E Ratio: 9
Price/Share: $24-$27

 

Example 2

During that same period, American Express, another company with a Durable Competitive Advantage, had a P/E Ratio of 6. Their stock price was trading between $10 to $15 dollars.

Year: 2009
Company: American Express Company
P/E Ratio: 6
Price/Share:  $10-$15

 

Be Afraid of a Raging Bull Market

The Economic Cycle is part of nature. It is like the sun rising and setting. The sun does not rise forever. Once the sun rises to its peak, it will come down and set. Very much like the sun, the economy will rise and fall over and over again until the end of time.

A "Raging Bull Market" is an economy that is rising very, very fast. The economy, however, does not rise forever. It will eventually fall. A Raging Bull Market is an indication of a recession coming around the corner. This is when the P/E Ratio of most stocks are greater than 40. When the times are really good and the Intelligent Investor is doing financially well, he considers selling stocks and switches his investments to government bonds. Cash in your profits and wait for a recession to come. Just think, what goes up must come down.

 

My Financial Analysis of Stocks

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