How to Turn a Stock Market CRASH into CASH (eBook)

CONVERSATION ONE;

INTRODUCTION TO CONCEPTS AND BASICS

Investor: Crash to Cash? What kind of crash?

Steve: A major crash in the stock market like the one we are currently experiencing in 2022/2023, or the COVID crash in 2020, or the financial crisis crash in 2008/9. Lots and lots of less severe crashes/dips too.

Investor: So, you are going to recommend something like investing in the “tech wreck?”

HIGH RISK STRATEGIES ARE NOT NECESSARY

Steve: No, I don’t recommend investing in individual stocks, sectors, hot countries etc. Way too risky. You don’t have to invest in a particular stock or “sector” such as “technology” to make great returns from a crash. The methods we will discuss are MUCH safer.

Investor: So, you have a low-risk way to make a lot of money in the stock market, particularly when it crashes?

Steve: YUP! The method we will discuss has worked every time over the last approximately 80 years (since WW2).

Steve continuing: To decide whether a particular company’s stock will recover from a crash and therefore could be a good investment, you must determine why the company’s stock crashed. Among the dozens of reasons you have to study and evaluate are a change of management, a law suit, product recall, new competition, technical obsolescence, labor, material, or supply chain issues, older inefficient factories/processes resulting in high costs, expiration of an important patent, on and on. Some changes may have a short-term affect and the stock may recover while others could signal that the company is in real trouble and could even go out of business.

Even the “TV” pros record of predicting the future of a stock are about 50/50; may as well flip a coin. One of the “poster children” for how hard predicting a particular stock’s future is the case of ENRON. Enron was named “America’s most innovative company” for 6 consecutive years, had sales of $101 billion in 2000, 20,000 employees, and on October 18, 2001, was given a “buy” rating by 12 of the 15 analysts whose job was to study and rate it for the public. In fact, the other 3 analysts gave it a strong buy recommendation. Enron filed for bankruptcy two months later in December 2001.

Investor: Yes, that does ring a bell, wow! So, what do I buy on a crash?

SP500 BASICS AND THE SAFEGUARDS BUILT INTO THE TECHNIQUES YOU WILL LEARN

Steve: The answer is very simple and straightforward, and yet I didn’t put this all together until maybe ten years ago, almost 30 years after getting an MBA in finance (1983) and twelve years after passing the CFP (Certified Financial Planner) boards (2001). Have you heard of Warren Buffett?

Investor: Yes, of course.

Steve: 2020 quote from Mr. Buffett: “In my view, for most people, the best thing to do is to own the S&P 500 index fund. People will try and sell you other things because there’s more money in it for them if they do.”

Investor: Yes, I have heard similar quotes from Mr. Buffett.

Steve: What I have never heard of or read about is anyone telling us how to buy the SP500 during a market crash. That is in fact what we are going to learn to do in these conversations. You will learn how to buy the SP500 on a dip or crash in a strategic, disciplined, “math” based manner and hold the fund until it recovers to its previous record high or preferably beyond. Simply put, we are going to learn how to “buy the SP 500 low and sell it high.” Here are two handouts for you to spend a little time on.

“HANDOUT” ONE / APPENDIX: See the appendix, pages 59-61 for detailed info on the SP500.

“HANDOUT” TWO / APPENDIX: See the appendix pages 61-63 for all the safeguards built into the “Crash to Cash” methods you will be learning.

Investor: Sounds interesting, but what kind of “cash” are we talking about making? A few percent?

INTRODUCTION TO THE 30/30 STRATEGY

Steve: I call the first plan I came up with the “30/30” strategy. I did a paper on this technique for an elective course in the stock market way back during my 1979-1983 MBA program. I have used this technique successfully many, many times since 1983. The basic technique will make about 30% on every dollar you invest during a 30% crash in the SP500, hence the 30/30 name. You will also make your last buy at about the minus 30 percent point, so it really could be called 30 / 30 / 30 strategy: 30 percent crash / 30 percent return / -30 last buy level. I will refer to this as the basic “30/30” strategy throughout our discussions.

With this 30/30 technique, the original 1983 strategy I used to buy on a crash, you are going to learn how to systematically buy more as the SP500 drops, using an accelerated dollar cost averaging technique (DCA), then sell when the market recovers to its previous record high, or in some cases recovers to a new all-time record high.

Investor: Dollar- cost averaging sounds familiar, but could you detail it a little for me please?

DOLLAR - COST AVERAGING (DCA)

Steve: Dollar- cost averaging is the strategy of investing in “equities” like individual stocks, mutual funds, or ETFs, at intervals rather than putting your investment in at one point in time. Often the intervals are evenly spaced, such as monthly, with typically very similar amounts of invested funds. For example, if you make regular contributions from your weekly or monthly paycheck to an investment or retirement account, such as an IRA or 401K, you are dollar-cost averaging.

Investor: Which spreads out purchases over fluctuating stock prices.

Steve: Yup, the advantage of dollar-cost averaging is that you’ll buy both when prices are low and high but with about the same amount of money invested each time, you will buy more shares when the prices are lower. Effectively you are “buying on the dip” to some extent with DCA. This lowers your average purchase price. Dollar-cost averaging is a very mild version of the 30 / 30 strategy, which in turn is the foundation of “Crash to Cash.” The modification I use is that the amount of money invested is higher (accelerated) with each drop in the SP500 index, thus lowering the average purchase price even more and taking advantage of the magic math of crash buying.

Investor: I get that, makes sense. The magic math of crash buying? Please explain.

THE MAGIC MATH OF CRASH BUYING / NORMALIZATION

Steve: It helps that when buying “on sale” the math always works in your favor. In fact, I refer to it as the “magic math” of crash buying. For example, if the market drops 33% from a “normalized” 100 level to only 67, in order to get back to the 100 level it must go up 33 and 33/67 is 50%. It has dropped an average of 33% about a dozen times since WW2. If the SP drops 50% as it has three times since the end of WW2, it must and does go up 50/50 = 100% just to get back to its previous record high.

“HANDOUT” THREE / APPENDIX: see the appendix pages 63-64 for more on “normalization” and the “magic math” when buying into a crash.

Investor: My ears perked up on that one. The SP500 index drops 33% but when it recovers just to where it was before the crash, I make 50% on my money.

Steve: Yup, that is what the magic math does for you. You were really listening!

Investor: Using the 30/30 basic strategy I will make about 30% on all the money I put into the crash when the SP500 recovers?

Steve: Absolutely

Investor: Thirty percent sounds great, 50-100% sounds even better. So, let me get this straight. The SP500 crashes about 30% and I make 30% on all the money I put in using a simple accelerated dollar cost averaging technique, buying progressively more if the market continues to drop all the way to minus 30% from its all-time record high? EZ to remember, 30/30. That also assumes that I sell when the SP500 recovers to its previous all-time record high.

INTRODUCTION TO THE 200-500% RETURN STRATEGY

Steve: Yup, EZ to implement and remember, and not too bad a return. But if that was all there was to this “Crash to Cash” thing I would not have bothered to sit down and have this conversation with investors like yourself. In the next evolution of this technique, I have learned how to make percentages on the order of 200 to 500%.

Investor: Seriously? I have my doubts, after all if it sounds too good to be true it probably is!

Steve: I agree with your sounds too good to be true skepticism, but you will be convinced by the numbers soon. The simple modification that takes returns from about 30% to say ten times that (300%) is to continue to hold onto the SP500 after the market recovers to its previous record high, selling after the SP500 is in new record high territory.

Investor: Sounds complicated, can you give a quick example?

Steve:...