If I were a seasoned expert:
1.) After Black Friday 2014 when Saudi Arabia announced it would hold oil production steady for the foreseeable future, I would've purchased $1 of the VelocityShares 3x Inverse Crude Oil ETN (OTC:DWTI) for every $10 I had invested in oil equities.
2.) I would have had a limit order set on Johnson & Johnson (NYSE:JNJ) for $81.79/share.
3.) I would have had a limit order set on General Electric (NYSE:GE) for $19.37/share.
4.) I would have had a limit order set on Procter & Gamble (NYSE:PG) for $65.02/share.
5.) Throughout this obvious volatility, I would have a position in VIX equivalent to 2-3% of my portfolio.
6.) I would have had a limit order set on Wells Fargo (NYSE:WFC) for $47.75/share.
7.) I would have had a limit order set on Colgate-Palmolive Co. (NYSE:CL) for $50.84/share.
8.) I would have had a limit order set on The Dow Chemical Company (DOW) for $35.11/share.
9.) I would have had a limit order set on PepsiCo, Inc. (NYSE:PEP) for $76.48/share.
10.) I would have waited to purchase Chevron Corporation (NYSE:CVX) instead of buying its second dip in January 2015.
I. Hindsight Is 20/20
Hindsight is 20/20, but that doesn't mean we have to look at the future blind.
II. Volatility As A Hedge
What has been happening to the market the past few days has been long overdue. We have been hearing for months, if not years, how the S&P 500 is overvalued and overdue for a correction. Most Seeking Alpha readers are well aware of the fragility of the "economic recovery." Yes, we have seen a prolonged bull market, but we know it has been created from the worst policies - irresponsible monetary policy from the Fed, which has kept interest rates so low for so long, the only place investors have had to go to find any return are blue chip dividend stocks, driving the price of historically slow growing, low P/E ratio stocks through the roof. And let's not forget currency devaluing.
The VIX ETF is a gauge of volatility.
Interestingly enough, over the past 2 years, VIX has shown very little activity and staying mostly stable. However, during the crash over the past few trading days, it has skyrocketed. Having a small percentage of your portfolio being an index that stays rather stable except when the world is collapsing could be advantageous to the skilled investor.
III. Keep Outrageous Limit Orders On High-Quality Blue-Chip Dividend Aristocrats At All Times - Just In Case
Those limit order prices I mentioned above were today's lows set during the opening 1,000+ point crash the Dow suffered this morning. In almost all cases, they are also 52-week lows. Most of the stocks recovered 10-20% above those numbers intraday. It is statistically impossible to have all those limit orders set as I mentioned above. However, it wouldn't be a bad idea to have a significant sum of money you can stand to part with sitting idly by in a brokerage account with very aggressive limit order buy prices set at all times on these high-quality blue-chip dividend stocks. If you were one of the lucky ones that had limit orders set, you could have scored big today, instantly gaining 10-20% in your position by the closing bell and scoring tremendous dividend yields that could compound for decades to come - if you choose to hold that stock.
The downside is this requires a substantial sum of money be available to set these limit orders. Many, including yours truly, cannot afford to have multiple limit orders funded and ready for a very rare opportunity like this morning. Maybe the answer for folks like myself is instead to focus on a single stock or two of the highest quality, or to do the same with an ETF. As I age and my wealth grows, it will be easier to create these lying-in-wait positions when more disposable income is available.
IV. The Patient Investor Is Often The Most Rewarded
I purchased Chevron when oil appeared to have been leveling off and slowly recovering after it dipped back down into the $102/share range. Things seemed to have stabilized and I thought I was getting a great deal. I was wrong. This oil slide has been far worse than I had ever imagined. After looking into some history, it seems the 1986 Oil Glut had some striking similarities to today's events. After scouring through the NY Times archives looking at Chevron's old EPS reports from the 80s, I was able to piece together an interesting series of charts.
Chevron took more than a year to recover after oil prices rebounded in 1986. If I were a better student of history, I would have exhibited more patience. History has shown us that oil stocks are a lagging indicator of an oil price collapse by a year or more, and if I were to have fully understood that beforehand, I'd still be hoarding cash and looking at an entry point that's currently more than 30% more attractive than when I bought in.
V. Applying The Past To The Future
I did not hedge my bet on Chevron with a purchase in an inverse oil ETF. If I would have done that, the ensuing spike in oil inverse ETFs would have created significant capital I could have then used to average down Chevron at a much lower price. This is hindsight, of course - if oil would have continued its rebound, it would have wiped out gains I could have seen in Chevron.
Still, it has been a learning experience. What I have decided is that when Saudi Arabia does cut output - and it must eventually happen - it will be time to purchase a small quantity of the VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWTI). No more than I can afford to lose, of course, but if Saudi Arabia is the catalyst for the oil crash, it may also be the catalyst for a recovery.
I come to you all a young man at the age of 29 with, God willing, a full investment lifetime ahead of me. While I am proud of how much I've grown over the years, I am also humbled every day by the vast ocean of knowledge I have yet to learn. Most of this knowledge can only be taught through experience. I am writing this article today to share my newfound experience, and the revelations I am learning through my journey towards financial independence.
I am largely unphased by today's events. I never intend on selling my investments, so the paper losses do not bother me much. There may be blood on Wall Street, but there is none on my driveway. Still, my paper losses are substantial, and I am determined to learn from today's events so I can apply them to the future. Mostly in terms of buying fantastic companies at deep discounts. What burns me is not that I lost substantial paper value. What burns me is that I missed out on $81 JNJ, $19 GE and $50 CL.
But we also must remember we cannot see the future, and none of us knows what tomorrow brings. The intraday lows I mentioned above may seem like amazing values today, but if more blood is spilled on the Street, they may seem like obscene price gouging a week from now. We must be vigilant in our quest for seeking value, and if we cannot come away with an amazing trade, we hopefully can at least come away with an amazing lesson learned.
Disclosure: I am/we are long CL, CVX, DOW, GE, JNJ, PEP, PG, WFC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.