Do you have a brain?
If so, then I am very confident you are going to have a major edge investing over the next five years.
I know that sounds like a ridiculous thing to say. You're thinking that it's obvious having a brain is a requirement for successful investing.
But for the past five years it hasn't been. In fact, thinking has been quite detrimental to stock market performance.
But that's going to change...
And when it does, your brain is going to serve you well. Because when this change happens, we're going to see stock market fireworks much bigger than those we saw this week.
So today, let me fill you in on what's happening and how you can prepare for it...
On Monday, the Dow Jones had its largest single day drop in history - down 1,600 points at the low.
Consider this your test run, folks. Because at some point in the future, we're going to have to sit through much worse.
Here's the problem... Which is actually something I have written about to you before...
Most buy and sell orders in the market today are thoughtless transactions.
That's right.
The vast majority of trades in today's stock market are being done without giving one ounce of consideration to the valuation or operating performance of the company in question.
The entities behind these trades don't care if the company is trading at 10x earnings or 100x. No valuation is too high.
The annoying part for fundamental investors like me is that for the past several years, being brainless has worked. As the market has chugged steadily higher, thoughtlessly buying has been a recipe for success.
Take a look at the chart below. If you've read my past articles you've seen it before.
It depicts the amount of money in recent years that has left actively managed mutual funds (red line) and how much money has poured into passive investment vehicles (blue line).
Since 2002, almost $2.1 trillion in cash has gone into passive (brainless) investment funds while $1.8 trillion has left active (thoughtful) investment funds.
I find that disturbing. But it doesn't even come close to telling the entire story...
On top of those passive funds, we have hundreds of billions of dollars stashed in algorithmic hedge funds that also give no thought to the companies that they buy or the prices they pay.
All in all, J.P. Morgan estimates just 10% of trading is caused by actual human stock pickers.1
So much trading, so little thinking. No price is too absurd.
Can you see how this is going to create some crazy results?
The market has been rising for years as massive amounts of money have gone into brainless investment vehicles.
But when the market does finally turn the other way, all of that brainless money will come out a lot faster than it went in - we got a preview of this Tuesday morning.
But don't worry.
Eventually things will settle down and the market can get back to what it always does, which is meander upwards over the very long term.
But before things do settle down, we are going to get served up a monumental opportunity to seize stock market bargains - one that we need to be prepared for.
To be ready for this, I strongly recommend having a sizable portion of your portfolio directed towards income generating investments. Not only will those investments provide you with income cash to invest when our opportunity arrives, but those income generating investments also always outperform when the market slides.
Here's to looking through the windshield,
Jody Chudley,
Credit Analyst, The Daily Edge
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1Just 10% of trading is regular stock picking, JPMorgan estimates, CNBC