Senior Analyst, Freeport Strategic Opportunities
Nobody escaped the Great Depression…
The Great Depression: A Diary by Benjamin Roth gives us a glimpse of what life was like during the dark days of the 1930s.
Roth was a lawyer based in Youngstown, Ohio.
After serving in the army, he began his legal practice in the early 1920s. But the economic prosperity of that era came to an abrupt halt with the stock market crash of 1929.
And Roth started documenting his observations and experiences in a diary beginning in 1931.
It’s one of the best firsthand accounts of the challenges ordinary Americans faced during the Great Depression. It detailed the widespread foreclosures, political unrest, and mass unemployment… and viciously volatile stock market.
In particular, what jumped out at me was how many investors lost their shirts back then buying the dip.
As we’ll look at today, it’s a lesson worth paying attention to as stocks experience one of their worst selloffs in history.
When “Bargain Hunting” Becomes a Death Blow
On June 5, 1931, Roth wrote…
Immediately after the 1929 crash the speculators rushed in to buy “bargains” but were badly mistaken because the market kept going down and down even though industrial leaders kept on assuring the people that everything was fine and the worst was over.
Sound familiar?
And six months later, Roth wrote…
The record shows that in 1930 – over a year after the big stock crash – this man invested over $100,000 in common stocks at what then seemed to be bargain prices. The total value today at market prices is $30,000.
What most folks remember about the 1929 Crash were three infamous days in October – “Black Thursday” on October 24… “Black Monday” four days later… and “Black Tuesday” the day after that.
Over those three days, the Dow plunged almost 30%.
But that wasn’t the worst part.
The real pain began when investors started buying the dip. For many, that “bargain” hunting turned out to be the death blow.
Going by this chart, the buy-the-dip crowd thought boom times were back by April 1930. It wasn’t until July of 1932 that they finally threw in the towel.
And we could be looking at a similar “buy the dip” trap today.
That doesn’t mean to go to cash and run for the hills. It means thinking differently and investing accordingly.
So today, I’ll show you where you should be putting your dollars to work instead of buying the dip in popular tech stocks.
First, it’s important you understand something else about the Great Depression.
There’s Always a Bull Market Somewhere
Even during the 1930s there were bull markets in certain sectors.
For example, gold mining stocks.
Between 1929 and 1932, shares of Homestake Mining – the largest gold producer in the U.S. at the time – shot up 474%. And Dome Mines – Canada’s largest gold producer – jumped 558%.
We haven’t seen these kinds of gains in gold stocks this time around. But gold mining stocks have held up a heck of a lot better than hot tech stocks like Nvidia and Tesla.
In the February 7 Freeport Navigator, I drew your attention to the bull market in gold. And I recommended you buy the VanEck Gold Miners ETF (GDX).
This exchange-traded fund (ETF) tracks share in of the world’s largest and most successful gold miners.
Since then, GDX is up 7%. That may not seem like much. But it’s better than the 16% loss in the S&P 500 over the same time.
And there are other pockets of the market that look promising today, even as the tech route continues.
Time to Buy Value Stocks Again
Look at the chart below…
It shows the ratio of large-cap growth stocks versus large-cap value stocks. And it does this by comparing the relative performance of the S&P 500 Growth Index versus the S&P 500 Value Index.
When the ratio heads higher, investors are favoring growth stocks – think stocks with high rates of growth and price tags to match such as Amazon, Apple, and Tesla.
When it heads lower, they’re favoring value stocks – companies that are underpriced compared to their true worth.
What we’re looking for are extremes… because that’s when a reversal is usually around the corner.
Take a look again at the chart above. Notice the red circle? That shows the extreme valuation in growth stocks at the time of the dotcom bubble. From around March 2000 until seven years later, value stocks returned 36%.
That may not seem like much. It’s only about 4.5% per year. But it would have saved your portfolio.
Over that same period, growth stocks declined by 25%. Meaning value outperformed growth by a mile.
And with the growth-to-value ratio near all-time highs again, value stocks are poised to outperform growth stocks in the coming years.
One way to take advantage is by buying the Vanguard Value ETF (VTV). It holds a basket of large-cap value-oriented stocks. Companies such as Exxon Mobil and Berkshire Hathaway.
It also owns one of my colleague Charles Sizemore’s favorite stocks, Walmart.
These more value-oriented stocks have been out of favor relative to go-go tech and AI stocks.
But that’s the point.
You could buy the dip in Nvidia, Tesla, Microsoft, and other tech darlings. Or you could recognize that we’re in a new market regime and by what’s about to boom instead of what’s already boomed.
It may not be easy, and you likely won’t have much company. But it could greatly improve your performance over the long run.
Sincerely,
John Pangere
Editor, Freeport Strategic Opportunities