The market breathed a collective sigh of relief two weeks ago when news about Greece's orderly default emerged. Yet a closer examination of the deal reveals it succeeded only at delaying the underlying issues as opposed to curing them.
In the first case, the deal does little to address the massive fiscal deficits Greece continues to record. And in the second case, the deal didn't eliminate Greece's onerous debt burden, it merely changed the identity of the country's creditors -- that is, the 107 billion euro extinguishment of private debt was simply replaced by a 130 billion euro loan from a collection of international institutions.
At some point, policymakers will be forced to deal with these realities. And when they do, assuming the market responds accordingly, astute investors will have the rare opportunity to buy great companies at fire-sale prices -- as those with less experience will be running for the hills. Indeed, it's in times like these that fortunes are made.
So why didn't everybody get rich three years ago? The answer is fear. Most investors were simply paralyzed by the speed and magnitude of the market's collapse. At the time, it was something that most of us had never experienced before.
This time, however, we don't have the same excuse. As a result, I decided to articulate the three most important things to help investors avoid missing the bandwagon a second time around. I even go so far as to indentify the one stock that I plan to buy once Greece defaults for real.
1. Get your mind right
When I was in law school, I had a professor who would literally scream about the importance of getting your "mind right" when answering a legal question. What he meant was that it's imperative to appreciate context. And the same idea applies to investing. Namely, it's much easier to talk about being greedy when others are fearful than actually doing it.
For when the opportunity presents itself -- when there's context -- you're simply too scared.
To give context to an eventual and complete Greek default, in turn, it's helpful revisit the events of September 2008, as the financial infrastructure of the United States teetered on the brink of collapse. In just one week, Bank of America (NYS: BAC) undertook a last-minute rescue of Merrill Lynch, Lehman Brothers filed for bankruptcy, and the Federal Reserve effectively nationalized the largest insurance company in the world. Not surprisingly, as you can see in the chart below, the market responded in kind, losing nearly half its value before mounting its re-ascent.
While it's natural to focus on the market's precipitous decline, it's more important for investors to note the almost equally dramatic recovery. The lessons from the latter are twofold. First, the market is more resilient than we give it credit for. And second, fear is an asset and not a liability, as it's arguably the best barometer of value. You know stocks are starting to get cheap when you're getting scared.
2. Avoid vulnerable companies
In addition to harnessing fear, one must still know what to buy when the opportunity presents itself. Before getting to the one stock that I'm going to buy once Greece defaults for real, however, I thought it'd be good to first identify two types I'd avoid.
The first type includes capital-intensive companies headquartered in Greece. A good example is DryShips (NAS: DRYS) , a shipping company operating out of Athens. Quite simply, we have no idea how the European Union will manage a complete Greek default. While it may allow the country to remain in the monetary union, it also may not. And in the event of the latter, there's a real possibility that Greek companies will lose access to international funding -- something that's imperative to capital-intensive operations like DryShips.
The second type includes companies that rely inordinately on short-term credit markets, as these companies are the most immediately vulnerable to financial shocks. The mortgage real estate investment trusts Annaly Capital Management (NYS: NLY) and Chimera Investment (NYS: CIM) are potential examples of this, as both depend on the shortest of short-term credit to operate on a daily basis -- what's known as the repo market. Although both survived the crisis, it was the inability to access this market that led to Bear Stearns' demise in March of 2008.
3. Buy the best
The last thing an investor should do when the market experiences severe convulsions is speculate on questionable companies, as they are the most vulnerable to the market's gyrations. A better alternative is to buy great companies at a great discount. For instance, imagine if you had picked up Apple for $92 at the end of 2008. It's now trading for around $600. What this demonstrates is that in times of trouble, there's no need to sacrifice quality for value -- you can have both.
With this in mind, the company I'm planning to buy when Greece defaults for real is JPMorgan Chase (NYS: JPM) -- unquestionably the best big bank in the United States. Unlike Bank of America and Citigroup, it very well could have survived the last crisis without the government's capital injection. And unlike Wells Fargo, it already has an established and highly esteemed investment banking operation. While JPMorgan also has significant exposure to the repo market much like Annaly Capital Management and Chimera -- to the tune of $52 billion -- that isn't the bank's sole lifeline, as it also has a sizable deposit base and access to the Federal Reserve's discount window in the event it needs immediate liquidity.
In addition, it's currently led by one of the best CEOs in America, Jamie Dimon -- who, not coincidentally, was responsible for steering the bank clear of the risks that brought many of its peers down three years ago. And it's also well-known that Dimon's annual shareholder letter is one of the few that Warren Buffett suggests all investors should read.
Finally, if things play out in a similar manner to how they did in the last crisis, its shares will likely suffer from association with its less savory peers. In 2008, for example, the bank lost upwards of two-thirds its value almost overnight. And this was despite the fact that its balance sheet was largely void of the toxic securities that plagued the financial industry. If its share price were to take another plunge, in turn, I'd welcome the move with open arms.
A veritable font of opportunity
At the end of the day, of course, the best way to get extremely rich is to expand your portfolio beyond already-established industry leaders like JPMorgan. Indeed, all it would take is a small investment in a company like Apple in its early years to set you up for life -- literally.
The challenge is identifying potential industry powerhouses in their infancy. At the most basic level, you want companies with niches in their respective industries which then leverage these positions to expand outwards. Amazon.com is a textbook example. It started by selling books online and is now one of the world's leading retailers of everything from electronics to beauty products.
One investor who's been extremely good at identifying companies like this is David Gardner, the co-founder of The Motley Fool. In fact, his lifetime annualized return is a remarkable 19.6%, versus just 8.1% for the S&P 500.
It's for this reason that David decided to make every one of his stock picks -- past, present, and future -- available to members of a new service called Supernova. In a free video that he recently released, David talks about both the new service and his methodology for identifying future multibaggers. To view the video while it's still available, you can either enter your email address in the box below, or click here now -- it is completely free.
At the time thisarticle was published Fool contributor John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Annaly Capital Management, JPMorgan Chase, Amazon.com, Apple, Citigroup, and Bank of America.Motley Fool newsletter serviceshave recommended buying shares of Annaly Capital Management, Apple, and Amazon.com, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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