At the end of today’s article, Quantitative Strategist Nicholas Vardy provides a free trade idea that allows you to play the market like Sir John Templeton! He does this by leveraging the power of ETNs (exchange-traded notes).
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The S&P 500 just suffered the worst January in its history. It dropped more than 10% since the start of the year.
And that’s the good news.
The Russell 3000 – the broadest measure of the U.S stock market – is down about 35% from its highs.
In the Nasdaq, the average decline in the price of a stock is approaching a whopping 45%.
Meme stocks… SPACs… innovation stocks… cryptocurrencies… they’ve all fallen out of bed.
GameStop (NYSE: GME) shares are down about 80% from last year’s highs. Ditto for AMC Entertainment (NYSE: AMC). (Don’t say I didn’t tell you so!)
Bitcoin is now down more than 50% from its highs.
Investors’ appetite for “buying on the dip” has faded.
YouTube channels dedicated to meme stocks and cryptocurrencies are fading fast.
We are clearly in a bear market in all speculative assets.
The question for investors is… What can they do about it?
As always, financial history offers the greatest lessons.
Echoes of the Dot-Com Bust
With its focus on “disruptive stocks,” the current bubble echoes the dot-com era more than any other recent episode of financial mania.
In the late 1990s, investors were convinced that the internet would change everything.
And they were right. Sort of.
But just as it is today, it was impossible then to tell which businesses would thrive in the “new era.”
After all, the internet bubble brought us Pets.com and eToys.
Yet it also brought us Google and Amazon (Nasdaq: AMZN).
And even Amazon – today one of the most valuable companies on the planet – had to endure a 95% drop in its share price.
And Amazon was lucky compared with the hundreds of other dot-com stocks that evaporated into the financial ether.
As one expert observed, “There are going to be some very large companies coming out of this, but that’s the easy part. The tricky part is finding which ones. Ninety percent of the companies may be total garbage.”
Sir John Templeton’s Bet on the Dot-Com Bust
Last week, I looked at a clever trade that helped Mark Cuban preserve his initial billion-dollar-plus stake in Yahoo stock.
Today, I want to look at a similar trade that profited from the bursting of the dot-com bubble.
This time, the trade was placed by the iconic international value investor Sir John Templeton.
Born in 1912, Templeton hailed from the tiny town of Winchester, Tennessee.
He graduated from Yale in 1934 near the top of his class and won a Rhodes Scholarship to Oxford.
After studying law in England, Templeton embarked on a grand tour of the globe that took him to 35 countries in seven months.
This journey exposed him to the enormous investment opportunities outside of the United States.
Ever the contrarian, Templeton embarked on an investment career on Wall Street during the depths of the Great Depression.
In 1954, he launched the Templeton Growth Fund.
A $10,000 investment in the Templeton Growth Fund at inception grew to roughly $2 million, with dividends reinvested, by 1992.
That works out to a 14.5% annualized return.
Templeton was best known for investing in Japan in the 1950s. That was when investors still associated “Made in Japan” with cheap toys found in cereal boxes.
In the 1960s, more than 60% of the Templeton Growth Fund’s assets were invested in Japan.
Templeton also had the savvy to sell out of Japan well before the stock market peaked in 1989.
Most importantly, Templeton grasped financial history – and the ebbs and flows of financial markets.
In 1999, Templeton predicted that most internet companies would be bankrupt within five years.
He then put his money where his mouth was and very publicly shorted the U.S. tech sector in December of that year.
At first, his positions went against him.
But just three months later, Templeton’s bet against the dot-com stocks turned profitable. He made $90 million in a matter of months.
Templeton’s timing was almost perfect.
It’s a great irony that Templeton – a patient long-term value investor – made his quickest fortune by shorting U.S. tech stocks at the ripe old age of 88.
Of course, Templeton’s bet looks brilliant with the benefit of 20/20 hindsight.
But even Templeton had his shorts in dot-com stocks go painfully against him at the start.
Still, like all experienced investors, he had seen this movie before. And the ending was as inevitable as day follows night.
Trade Like Templeton
There’s no doubt Templeton would have repeated this trade against today’s speculative assets.
The good news is that today you can replicate Templeton’s trade – with the click of a mouse – through a wide range of ETFs that bet against the market.
I’ve uncovered a 3X leveraged short exchange-traded note (ETN) – the MicroSectors FANG+ Index -3X Inverse Leveraged ETNs (NYSE: FNGD) – that allows you to bet against the much-hyped FAANG stocks and do so using leverage.
A highly volatile short-term instrument, it is already up 45% year to date.
Sir John Templeton would be pleased.
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