A Survival Guide for the Worst Market Crashes, Part 2

Tim Melvin

When I was considering the question of whether or not rate hikes mattered, I realized something even more profoundly simple.

Nothing actually matters in the financial markets, until it does.

I have seen stocks shake off rate hikes, wars, New England Patriots Super Bowl victories, ridiculous fiscal policies, and other sorts of calamities before calmly moving higher. I have also seen markets that collapse on fears of currency moves, human error, and stupidity (the most common cause of market collapses).

We'll never know what the market is going to say, but once it does speak, there are certainly tools you can use to decipher its message.

Personally, I prefer the toolkit outlined in Part 1: buying assets trading far below their fair value, waiting until they rise back to that fair value or higher, and selling them for a huge profit.

However, I know that while I may be a smart guy, I'm definitely not the smartest guy participating in the markets. I have my own investing philosophy that's worked well for decades, but I'm certainly not above freely stealing ideas from other bright investors if those ideas make me taller, better looking, or wealthier.

With that in mind, today I'll show you two ways to hear what the market is saying, sidestep the worst market conditions, and generate huge windfalls as everyone else runs for the hills.

And these two methods happen to have been developed by the unlikeliest of investors – a California surfer and a former Marine…

Method No. 1: The Timing Model, Developed by a California Surfer

The first and simpler model of the two was developed by Mebane "Meb" Faber, who skied on Lake Tahoe and surfed in Manhattan Beach, Calif., before developing some of the most successful quantitative approaches to stock selection out there.

Faber's unique approach – often called the "Timing Model" – centers on understanding that the real damage from bad markets doesn't come from the price decline itself.

5 years and 0 realized losses – for the first time ever, he went LIVE to show how he does it. Watch the replay now…

Instead, the real damage comes from investors' psyches, which scare them into selling near the low when the pain from market sell-offs is just too much for them to bear. That same fear is what prevents them from getting back into stocks even when conditions have improved and it's safe to do so.

His rules of capitalizing on these emotions are simple…

If the S&P 500 is above the 200-day moving average, buy stocks. If the S&P 500's closing price on the last day of the month is below the 200-day moving average, sell stocks and hold cash. We only check the price-to-moving average on the last day of the month and ignore intra-month price movements.

By following these rules, you effectively ride the market higher when it's already high, but hedge any downside by selling before the panic sets in.

Sticking to these parameters lessens the chances of getting whipsawed around by short-term market movement. In other words, it allows you to keep your sanity when everyone else is losing theirs.

The hardest part about this approach is having enough courage to actually stick with it. Unlike traditional money-management approaches, this type of asset allocation outperforms in big bear markets, but underperforms in multi-year bull markets since you don't get back into stocks until the recovery is underway.

If you have the discipline to stick with it, this simple model can give you index-like returns without the excruciating pain of massive drawdowns.

Speaking of excruciating pain, this next risk-control model comes to us from a former Marine Corps captain whose idea of fun is strapping a 35-pound rucksack over his shoulders and trekking 28 miles through the hills of Pennsylvania…

Method No. 2: A "Military Model," Developed by a Former Marine

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Tim Melvin

About the Author

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Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of "Max Wealth" and Heatseekers.

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