How to Turn a 2020-21 Market Crash Into an Opportunity to Make a Million

Here’s why it’d be a bad time to bet the farm on the hottest stock of 2019 as the market overextends itself.

If you followed Warren Buffett’s timeless piece of advice by being “fearful when others are greedy” and “greedy when others are fearful,” you’ve probably found that it’s been a whiz to beat the S&P 500 and TSX Index over the last few years. As we head into a potentially volatile U.S. election year, the contrarian strategy of buying dips and selling pops may continue to be a winning strategy for investors.

The early-2018 market melt-up caused a lot of investors to buy stocks on the fear of missing out. Those who chased the parabolic rally got punished with a very sudden 10% correction. On the flip side, if you’d bought on the October-December plunge, a time when many so-called pundits pronounced that the buy-the-dip strategy was “dead,” you enjoyed a 22% bounce back in just over a quarter.

Buffett’s contrarian strategy is undoubtedly “old-fashioned,” but in the current environment, sometimes the old tricks are the best tricks.

Whenever a talking head on television pronounces that “things are different this time around,” either referencing positive or negative paradigm shifts, you should remain skeptical and prepare for a reversal of sentiment, as it may have overswung either to the upside or downside. By buying into news that everybody has already bought into, you’re doing yourself no favours. You’ll be paying up a premium relative to those who’ve bought in early and will be left holding the bag should things unexpectedly change for the worse, as they always do.

Heading into 2020, the stage could be set for another sharp correction (or bear market), like the one experienced through 2018, as investors begin to assume that the U.S.-China trade war is imminently headed for a peaceful conclusion and that Fed chair Jay Powell will stand pat.

A reversal of recent progress in the trade war and commodity-price-driven inflationary pressures could send us back to where we were in December 2018. While it’s impossible to predict what will happens with regards to U.S.-China trade, it is foolish (that’s a lower-case f) to assume it’ll be over just because a phase one deal is almost in the bag. Moreover, the recent bounce in oil prices could reignite the U.S. Fed’s hawkish stance again, as inflation rears its ugly head — a surprise scenario that could cause a quick reversal of fortune.

But regardless of what causes the next big dip, it’s times of turmoil where millions are made by a foolish few who are ready and willing to go against the grain.

Bad times don’t last forever, but nor do good times.

So, it’d be prudent to initiate a position in out-of-favour defensive dividend stocks like Emera, which is down around 6% from September 2019 all-time highs, and not double-down on more economically sensitive, higher-beta plays like Shopify, which could put investors at risk of amplified negative moves in a downside scenario.

I wouldn’t advise timing the markets on a week-to-week or even month-to-month basis, but as greed or fear overextends itself, it does make sense to roll with the punches and prepare to act in a contrarian fashion to make a quick buck off those who follow the herd.

Foolish takeaway

Defensives are out; cyclical plays are in. And while there’s no telling exactly when the tides will turn, it’s only prudent to keep some dry powder on the sidelines for the next big dip and not put it all to work even though you may feel foolish for doing so.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify.

More on Investing

Investing

$1,000 Ready to Deploy? 3 Quality TSX Stocks for Canadian Investors

Amid improving investors sentiments, the following three Canadian stocks offer excellent buying opportunities.

Read more »

Blocks conceptualizing the Registered Retirement Savings Plan
Dividend Stocks

RRSP Investors: 3 Canadian Dividend Stocks to Buy on Dips

These stocks have strong track records of dividend growth and now trade at discounted prices.

Read more »

concept of real estate evaluation
Dividend Stocks

Beyond Real Estate: These TSX Income Generators Could Deliver Superior Passive Income for Canadians

These two TSX dividend stocks could offer Canadian investors a reliable income stream and strong long-term upside, without relying on…

Read more »

Confused person shrugging
Dividend Stocks

Better TSX Dividend Stock to Own: Manulife or Sun Life?

While Sun Life stock has outpaced Manulife in the last two decades, which dividend-paying insurance giant is a good buy…

Read more »

A plant grows from coins.
Energy Stocks

Got $25,000? Turn it Into $200,000 in a TFSA as Canadian Dollar Gains

This energy stock may not have a high dividend, but it certainly has a high rate of growth to look…

Read more »

coins jump into piggy bank
Dividend Stocks

How to Use Your TFSA to Earn $1,057/Year in Tax-Free Income

Investing $5,000 in each of these high-yield dividend stocks can help you earn over $1,057 per year in tax-free income.

Read more »

data analyze research
Tech Stocks

Is BlackBerry (TSX:BB) a Buy in May 2025?

While its recent downturn might not look pretty, it might be the best opportunity to buy BlackBerry (TSX:BB) stock and…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Investing

Where I’d Invest the New $7,000 TFSA Contribution Limit in 2025

If you have $7,000 for the new TFSA contribution increase, here are three stocks I would contemplate adding to the…

Read more »