Fortunes have been made in the past two months. Some shares have soared over 300%. The 'dash to trash' has been lucrative, but risky. There is a better strategy.
The FTSE 100 has bounced a more than impressive 28% off its March 2009 lows. The past few trading days have been somewhat more subdued, but prior to that, the market was regularly jumping 2%, 3% or 4% in a day.
It's one of the quickest bounces of that magnitude in history, and certainly the most impressive I've seen in my 21-year investing career.
But that quick 28% gain pales into insignificance when compared to the biggest bounce back winners from the FTSE 350 index.
Drum Roll Please…
And the biggest winners were…
It seems so obvious now, in hindsight, that banks were oversold and simply had to rebound. Cue massive profits in Barclays and Royal Bank of Scotland.
But did you have the skill, the guts and the luck to pull the trigger right at the bottom of the market? No? Me neither.
You Should Have Climbed Aboard This Bank Stock Express
The closest I got was this article from 20 January titled Time To Take A Punt On A Bank. At the time, Barclays was 88p and Royal Bank of Scotland a mere 11.6p. If you climbed aboard, congratulations. If you sat on the sidelines and did nothing, at least you've not lost money.
Sticking with the financials, boring old life insurer Legal & General has also taken off. As with the banks, it appears investors saw the shares as just too cheap when they were trading around 23p.
The last pure stock market panic was in March 2003. At that time, life insurers were being hammered as their solvency levels became severely stressed. They were caught in a vicious downward spiral. As share prices fell, they needed to sell more shares to maintain minimum solvency levels. But the more they sold, the more the market fell.
I Almost Made A Fortune
This time around, everything was falling in an utter panic. At one stage, and I can't remember the actual date, but it must have been close to the 9 March low, I almost bought a basket of life insurance companies which would have included Legal & General, Aviva (LSE: AV), Prudential (LSE: PRU) and Standard Life (LSE: SL).
My investment thesis was nothing more than "This market behaviour now is pure panic, and some of these life insurers must be beaten down far too far". There was no science, no valuation, and no deep analysis of their assets and their liabilities. It was pure gut feel.
But I didn't pull the trigger. I wimped out. I almost made a fortune. But I didn't.
No Disgrace In Missing The Rally
In fact, I didn't buy shares in any of the top 10 bounce back stocks listed above. The very survival of many of the companies was in serious doubt.
Banks were possibly going to be nationalised. Heavily indebted companies like Debenhams, Inchcape, Taylor Wimpey and Enterprise Inns were possibly going to the wall, or at best, were going to see shareholders wiped out in favour of banks and/or bond holders.
There is no disgrace to miss the huge rises in these companies. The number one rule of investing is to not lose money. It would have been very difficult to place your hand on your heart and categorically say "I will not lose money if I buy Taylor Wimpey at 13p."
The Investing Strategy For You
Buying struggling companies at bargain basement prices can be very lucrative, but also generally requires a lot of luck. A much better strategy is to buy shares in high quality companies trading at cheap prices.
The upside may not quite be as quick and high as the bounce back stocks, but the downside is not nearly as risky. And in this market and this economy, protecting your capital should be your number one priority.
It's precisely this strategy that Maynard Paton employs at The Motley Fool's Champion Shares premium stock picking service. You can get instant access to all his current buy recommendations by signing up to a free 30-day trial. Click here for more details. STOP PRESS: The Champion Shares portfolio is beating the market.
More on the economy and the markets:
> Of the companies mentioned in this article, Bruce Jackson has a beneficial interest in Barclays.
