Don't you wish you could just be set for life? Sure, we all do. Some get lucky.
Consider the case of Bobby Bonilla. He is 57 years old. He hasn't played for the New York Mets since 1999. He hasn't even played pro baseball since 2001. But the Mets still pay him a $1.2 million check every July 1. And they'll continue to do so until 2035, when he's 72. You have to love that.
So how did he score that? In 2000, the Mets agreed to buy out the remaining $5.9 million on Bonilla's contract. But instead of a one-shot deal, they chose to make annual payments of nearly $1.2 million for 25 years starting July 1, 2011, including a negotiated 8% interest. Wow!
Back then, Mets owners invested in Bernie Madoff, who promised double-digit returns. Maybe they were confident that would last ... Oops!
But how do us ordinary people set ourselves up like that? There's actually a way. And it's not that hard. Buy outlier stocks that pay dividends. Reinvest the dividends, and you eventually could get a quarterly dividend payment equal to your initial investment.
Warren Buffett figured that out long ago, sometime near when he learned the ukulele so he could serenade his crush, Betty Gallagher. He was buying dividend stocks back then. Betty chose the other guy, but Warren did okay in investing.
The strategy's shortcoming is that it takes a long time. But it's as close to a wealth guarantee as you're going to get. Here's the best part about that strategy: it works best when markets go down, as long as you're buying the dips.
Assume today you have a source of great stocks and you're ready to take the plunge. Is it a good time to buy? Does it matter to a long-term strategy when you buy? Like much in life … yes and no.
Buying at the top before a pullback means waiting until you're above water again to start seeing results. But here's the single most important thing you need to know about the stock market: the game is rigged. Stocks go up over time. It's a fact – or at least it's been a fact for 100 years. Here's a 100-year chart of the Dow Jones Industrial Average:
But it's not just the United States. Here's Australia:
Here's Japan's Nikkei over 67 years:
And here's Germany's DAX over 27 years:
You get the picture… TAGU. They All Go Up. ALL stocks around the world tend to rise in the long term. Outlier stocks are the best of the best. And superior selection means the difference between average returns and an outlier return.
My research firm is dedicated to finding outliers. Our historical backtested study shows how owning outliers might have beaten the market by 5,000 times. The blue line is a semi-annual rebalanced portfolio of outlier stocks, while the orange is the S&P 500 Index. Find out more here.
So, we now know that we should buy stocks. We also know that we should buy the best stocks. Buffett knew this and also famously said "… be fearful when others are greedy and greedy when others are fearful." In other words, buy when there's blood in the water.
That brings me to where we are in the stream. Look, there's no bad time to buy great stocks. But there are better times. March 20 was one of them. Right now is not one of them.
Here's the deal: if you ask me, I'd have a shopping list of great stocks to buy for an impending pullback in stock markets. Why do I think that the market will have a healthy correction soon?
First and foremost, the Big Money Index is falling. Indexes may be softly rising or treading water, but under the surface, we see a shift. Sellers have been creeping out of the woodwork.
I first made mention of buyers taking a vacation about a month ago. And since then, around June 8, the SPDR S&P 500 ETF Trust (SPY) has returned -2.97%. Let's compare that to the prior two months:
- May 8 – June 8: SPY +10.52%
- April 8 – May 8: SPY +6.72%
And just in case you conveniently forgot, there were three very ugly days for stocks in June:
- June 11: SPY -5.76%
- June 23: SPY -2.55%
- June 25: SPY -2.38%
Forget what the headlines might have been saying on those days. Here's a chart of the Mapsignals Big Money Index. It nets off all of the big money buying and selling on a 25-day moving average.
That huge ramp in April through June? That's big money flooding into stocks. But when big money gets full and loses its appetite, look what happens:
The left circle is when the yellow line petered out and just started to fall. It prefaced the dramatic drop in late February through March. And it now correlates to the choppiness the market has had during the past few weeks. It foreshadows a potential pullback or at least a cooldown.
Sectors also point to a pause in binge buying. Discretionary, financials, and technology were powering markets higher, yet buying has suddenly evaporated.
Here are the Mapsignals Big Money Sector Indexes. They show the buying velocity in stocks. Rising green signals accelerating buying, while falling green means buying is slowing down.
Consumer discretionary sector
It's obvious that the powerhouse buying behind the market's climb is slowing in these three sectors. This isn't all bad. It just means that the market might offer us (disciplined long-term buyers) better prices to build our Bobby Bonilla-type future payday.
You may not be an athlete with a 25-year million-dollar contract. But that's okay because I'll give you the secret to getting rich:
- Buy stocks.
- Know which outlier stocks to buy.
- Reinvest dividends.
- Buy when they go on sale.
- Have plenty of time.
To hit a home run in stocks, wait for the fat pitch. But you still need to swing … Bonilla knew it when he said, "I'm not afraid to swing the bat. If they elect to pitch to me, I'm going to swing."
The Bottom Line
We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see market pullbacks as areas to pick up great companies.
Disclosure: The author holds no positions in any mentioned securities at the time of publication.