Worried about 2015 yet?
The last few days have been a wake-up call for investors.
As usual, it feels worse than it is.
In the last ten days the S&P 500 and Dow are both down only about 4%.
But the CBOE S&P 500 Volatility Index (a.k.a. “The Vix” and “The Fear Index”) has surged 75% over that time.
It’s a massive overreaction. But it shows how nervous investors are right now. And nervous investors will act irrationally and will cause a lot of volatility in 2015.
That’s why next year we expect more volatility, one or two major scares, and some big opportunities out of it all.
Here’s a simple roadmap for you to capitalize on it all.
How to Beat the Market in 2015
A few years ago researchers at Tweedy, Browne put together an analysis what makes a winning stock.
The study was called What Has Worked in Investing.
It broke down the common characteristics of what makes a winning stock over a number of periods stretching far back as 100 years.
It also covered studies of historical returns in more than two dozen international markets.
Basically, it is a comprehensive study of what works in all markets all the time.
Here are four of the most common features of those consistently winning stocks:
- Low Price-to-Book Value (P/B) – the P/B ratio is a great indicator of how cheap a stock has become. It compares the value of a company’s assets relative to its stock price. Over time low P/B stocks have always outperformed high P/B stocks.
- Low Price-to-Earnings Ratio (P/E) – just like the P/B ratio, the P/E ratio is an indicator of how cheap a stock is relative to how much money the company is making. Over time low P/E stocks have always outperformed high P/E stocks.
- A Significant Decline in a Stock’s Price – there’s nothing better than a stock that has fallen significantly. Our research here in the Profit Alert has proven the worse a stock has done, the better it is likely to do. The stocks down 70% are beaten by the stocks down 80%. The 80% decliners are only beaten by the 90% decliners. The worse the better when it comes to stocks that have fallen. This study just provides more empirical proof.
- Small Market Cap – small-cap stocks and those priced below $5 per share are the ONLY place you can have an advantage in the markets today.
Hot stocks like Facebook and Tesla mentioned above have dozens of analysts and armies of reporters and media following them around.
Meanwhile, you can find small caps like these here at much better values than anything you’ll find in most large-cap stocks.
If you find small-cap stocks that meet the first three criteria above, they have a lot less risk than most investors think. Not to mention exponentially more capital appreciation.
Those are four things that you and most investors know work.
The problem, however, is that so few investors focus on them consistently.
If you can get past all the news, avoid the emotional reactions it causes, and let these basic principles guide you in the year ahead, history says you will be in a great position a year from now regardless how extreme the volatility gets in 2015.