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Editor's note: This week, in place of our normal commentary, we've gathered some of our top trading lessons. These are the lessons we wish we'd had before we started trading... lessons many of us learned "the hard way." Whether you're already an experienced trader... or a novice just beginning to put money in the market... you'll find this series incredibly useful.

The Headline All Great Traders Hunt For

By Brian Hunt, Editor in Chief, Stansberry Research
Monday, December 22, 2014

"Buy when there is blood in the streets." – Nathan Rothschild
 
Back in his day, Nathan Rothschild was like Warren Buffett and Alan Greenspan rolled into one.
 
Nathan was one of the founding members of the greatest banking dynasty in history. He and his family bankrolled wars, giant gold purchases, governments, and anything else that could pay them interest. Even kings couldn't match Nathan's power and influence. He's considered the man who financed Napoleon's final defeat at Waterloo in 1815.
 
Today, many estimate the Rothschild fortune totals billions or even trillions. (The family has always managed their accounts the right way: So nobody knows how large they are.)
 
Despite the enormous wealth he accumulated, Nathan is best known by the classic contrarian investment quote above.
 
"Blood in the streets" has become a cliché, but for good reason: To make extraordinary gains, you must buy an asset near the point of maximum pessimism.
 
In Nathan's day, in 19th century Europe, folks had plenty of chances to buy when blood literally soaked city streets and battlefields. The developing nations fought hideous wars at least once a generation. In today's age of relative peace, however, it's tougher to follow Nathan's lead.
 
I can't tell you to hop on a plane and scout rental properties or stock investments in a war zone. So here's the main thing to take away from "blood in the streets"... Great investors and traders are like bird dogs for news of disaster and despondency. They don't wince at headlines like "Gambling industry bankrupt," or "Indian stock market crashes for seventh day in a row." They get excited.
 
They know desperate situations create incredible values and incredible extremes in sentiment. They are always on the hunt for places where "things can't get any worse"... When things "can't get any worse," they can only get better.
 
It's only when things can't get any worse that you can buy world-class businesses for just four or five times annual profits... or safe bonds yielding 18%... or trophy properties for 80% below their highs. And despite what your emotions tell you, dark and gloomy situations have a way of working themselves out.
 
Note that in March 2009, most folks believed the Great Depression II was in the cards. There was plenty of blood on the balance sheets of bankrupt businesses and homeowners. The average stock climbed 60% in six months after the pessimism blew over. Many stocks climbed 200% and 300%.
 
So turn your completely normal, knee-jerk reaction to good news on its head. Don't rush out to buy a stock, a piece of land, or a commodity based on some bullish headline like "Analysts all agree... crude oil is going higher." Instead, hunt for headlines like, "Uranium prices sink to historic low... industry desperate for money," or "Argentina suffers currency crisis." Both of these headlines preceded huge gains in the past decade.
 
Like many great trading ideas, Nathan's quote has been "repeated" by other skilled investors: Warren Buffett tells us, "Be greedy when others are fearful and fearful when others are greedy." Steve Sjuggerud says, "You make triple-digit gains not when things go from bad to good, but when things go from bad to less bad."
 
However it's phrased, the idea behind "blood in the streets" is the same: Be on the lookout for desperate, blown-out sectors, commodities, and countries. This is where you'll find extraordinary deals. It has been the surest way to triple-digit profits for hundreds of years.
 
It will be the surest way for hundreds more.
 
Good trading,
 
Brian Hunt




Further Reading:

"If you want to be successful in stocks, there's one simple thing you have to do," Brian writes. "Focus on the price you pay. Buy at bargain prices." Learn more about how you can use this idea to make winning investments right here.
 
Brian recently revealed one of the all-time great investment secrets. He says, "You won't hear about it in the mainstream media... and very few people want to publicize this idea... but it's one of the safest, easiest ways to make great investments."

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Market Notes
It was a good year for...
 
Biotech stocks... sector fund IBB finishes the year up 35%-plus.
 
"Big Cheap Tech"... sector fund QQQ rises nearly 20% in 2014.
 
Real estate stocks... sector fund IYR breaks out to a new seven-year high in 2014.
 
Health care stocks... sector fund IYH closes 2014 up more than 25%.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1998.29 +0.4% +11.9%
Oil (USO) 20.87 -0.9% -40.3%
Gold (GLD) 114.87 +0.4% -4.0%
Silver (SLV) 15.09 -2.5% -21.5%
U.S. Dollar 87.98 -0.5% +9.9%
Euro 1.25 +0.5% -9.2%
Volatility (^VIX) 21.06 +3.1% +31.4%
Gold Stocks (^HUI) 153.64 -0.1% -22.1%
10-Year Yield 2.07 -2.4% -28.1%

World ETFs
Symbol Price
Change
52-Wk
India (IFN) 26.39 -2.6% +36.7%
USA (SPY) 199.57 +0.0% +13.5%
Taiwan (EWT) 14.97 -0.4% +7.5%
China (FXI) 39.30 -0.4% +4.4%
Singapore (EWS) 12.89 -1.3% +2.3%
Israel (ISL) 16.55 +0.3% +2.1%
S. Africa (EZA) 59.31 -0.8% -1.9%
Canada (EWC) 27.60 +1.6% -1.4%
Japan (EWJ) 11.18 +0.4% -3.2%
S. Korea (EWY) 56.24 +1.4% -9.7%
Lat.America (ILF) 29.25 -1.9% -18.6%
Russia (TRF) 8.25 -5.5% -41.6%

Sector ETFs
Symbol Price
Change
52-Wk
Biotech (PBE) 49.20 +0.0% +38.4%
Semis (PSI) 24.50 -1.2% +37.1%
Health Care (IYH) 143.26 -0.1% +28.0%
Transportation (IYT) 158.82 -0.2% +25.2%
Real Estate (IYR) 75.46 -0.1% +25.8%
Utilities (XLU) 45.57 +0.1% +25.3%
Big Tech (QQQ) 100.96 -0.6% +20.1%
Financials (IYF) 87.07 -0.2% +13.4%
Consumer Svcs (IYC) 132.14 -0.5% +13.0%
Defense (PPA) 33.42 +0.7% +13.0%
Retail (PMR) 37.37 +0.1% +11.6%
Software (PSJ) 37.99 -0.9% +9.9%
Industrials (IYJ) 103.42 +0.7% +7.6%
Insurance (IAK) 48.20 -0.3% +6.3%
Basic Mat (IYM) 79.06 +0.1% +2.9%
Telecom (IYZ) 28.24 +0.6% +3.1%
Media (PBS) 24.70 -0.5% -0.8%
Water (PHO) 24.51 +0.0% -1.5%
Construction (PKB) 20.53 +0.0% -3.2%
Alt. Energy (PBW) 5.00 +0.4% -15.5%