Editor's note: The storm clouds we're seeing in the market right now won't last forever...

Many investors fled the market this year as uncertainty surrounding inflation and ongoing geopolitical issues led to rampant volatility. And we're still in the early stages of this painful market. But that means we still have time to position ourselves to profit when the time comes...

That's why Extreme Value editor Dan Ferris believes it's crucial for folks to realize that the pain we've experienced throughout this massive downturn in the markets will actually help us benefit in the long term, and the time to take advantage is almost here...

In today's Masters Series, adapted from this month's issue of Extreme Value, Dan explains how today's rampant market volatility could create a slew of buying opportunities with high upside potential... details how this rare market setup could lead to massive long-term gains for value investors... and shares how you can position yourself to take advantage of this unique opportunity...

It's Time to Plant the Seeds of Optimism: Bargain-Hunting Opportunities Are Near

By Dan Ferris, editor, Extreme Value

This has been a rough year – to put it lightly.

Stocks got crushed. Bonds got crushed. Bitcoin got crushed. Mortgage rates more than doubled. Gold has disappointed many. And I bet we'll see more losses before the pain is over.

In such dire conditions, I'm not comfortable telling you to put new money to work today. But I do believe now is the prime time to start planting the seeds of optimism...

While we're not out of the bear market woods yet, a major opportunity to buy stocks at bargain prices is approaching – one that will likely lead to above-average compounding for many years.

There are two main reasons I say this. The first is obvious: Major equity indexes all over the globe have fallen by 20% or more.

Stocks become more attractive as they get cheaper. Lower valuations generally mean higher long-term returns and less risk. That is, after all, the entire premise of our main Extreme Value investing strategy.

For now, valuations of high-quality businesses are still elevated, even with stocks already down 20%. The second reason I see a major impending buying opportunity is the possibility of a sideways market.

This is an extreme scenario that we haven't discussed much... but that plays right into our strategy of buying good businesses at discounts to intrinsic value.

A sideways market is when the major stock indexes ratchet up and down but fail to make new highs for 10 years, 20 years, or more.

In Japan, investors have been stuck riding this emotional roller coaster for the past 33 years. And now, it looks like we may be boarding our own rollicking ride here in the U.S...

Sideways markets are periods when even the most experienced investors can succumb to fear or exhaustion, give up, and lose their fortunes. But they're also periods that present tremendous upside potential for disciplined, unemotional, long-term-oriented value investors like us.

And today, we'll outline the unique buying opportunity such a market will set up – one that could arrive sooner than you think.

According to this chart of the Dow Jones Industrial Average, there have been four major sideways markets in the U.S. since 1900. Each occurred after a mega-bubble or other type of bull market. The worst one lasted 25 years, from 1929 through 1954...

And it wasn't just the Dow. After the dot-com bubble peaked in early 2000, the Nasdaq Composite Index suffered a 15-year sideways market...

The scariest example of a sideways market occurred in Japan from December 1989... until now. That's right. It has been 33 years since the Japanese stock market peaked. And it still hasn't made a new high. In fact, it made a new low 19 years in...

The simple-minded reaction to these charts might be, "What's the big deal, Dan? You can just keep buying, and you'll wind up making a lot of money once the market reaches a new high."

True, but you'll be so psychologically brutalized by the roller-coaster ride that you'll be far more likely to sell out at huge losses just to make the pain stop.

Folks, those charts show more than just data. They highlight years of real suffering for real people.

If the current setup here in the U.S. plays out anything like it did in Japan, it could take decades of volatility before we hit a new high. Imagine this happening to the S&P 500 Index, starting at the January 2022 peak. Imagine retiring in 2022 and enduring nothing but volatility for 15... 25... or 33 years.

It's brutal. It could ruin millions of folks' retirements. You can't afford not to prepare for it.

Our frequent advice to hold plenty of cash, as well as some gold and silver, is designed to lessen the pain the equity market is dishing out... and could keep dishing out for much longer than you'd ever expect.

Odds of the U.S. replicating Japan's extreme sideways market seem so remote that nobody ever talks about it... but there are some parallels that we can't ignore.

In the years before Japan's 1989 peak...

• Japan's central bank kept interest rates too low for too long.
• Cheap money spurred borrowing and frenzied speculation in stocks.
• Real estate values skyrocketed, pricing out young buyers.
• The stock market soared – doubling in the two years before it peaked.

Then in 1990, all that reversed. Japan cranked up interest rates, speculators fled, real estate values plummeted, and stocks entered a bear market.

Does any of that sound familiar?

After a decade of low rates, lucky speculators raking in quick gains, a booming real estate market, and record-high stock valuations... things are now reversing in America, too. In an effort to fight inflation, the Federal Reserve has been raising interest rates for months. Speculators have sustained huge losses, home prices are falling, and U.S. stocks are down more than 20% since their all-time high in January 2022.

So what now?

Well, when things first soured in Japan, the Bank of Japan ("BoJ") tried to stimulate economic growth by cutting interest rates again, bailing out banks, and eventually even buying stocks. But it didn't work.

Instead, it stoked the country's famous "Lost Decade" of subpar economic growth from about 1991 to 2001. And despite having spent more than $430 billion on equity exchange-traded funds since 2010, the Nikkei 225 Index is still trading roughly 30% below its 1989 peak.

If the U.S. central bank attempts similar tactics now, as some investors expect it to, we could mirror Japan's results. That would be devastating for the average American. But not for us...

See, even if the U.S. enters a major "go nowhere" market that lasts decades... we can still make money.

It'll be harder, sure. We'll need to be disciplined and strategic. But we can still realize significant, long-term gains simply by sticking with the Extreme Value blueprint. Because luckily, you're reading the one publication that was built for such a market...

The No. 1 reason Extreme Value exists is to help you find great businesses trading at discounts to their intrinsic values.

As it turns out, that simple strategy is perfect for what may lie ahead...

In 2013, the Hong Kong University of Science and Technology Center for Investing published a white paper titled, "Performance of Value Investing Strategies in Japan's Stock Market."

The paper examined the performance of value strategies in the Japanese stock market from 1975 to 2011. It reported separate results for the then two-decade bear market from 1990 to 2011.

In a nutshell, value investing crushed the overall market during the latter period. The next table shows the growth in value of $1 invested based on four simple value metrics.

The dividend-yield strategy means buying stocks with the highest dividend yield. The other three strategies mean buying stocks with the lowest prices relative to book value, earnings, and cash flows...

These numbers don't indicate the returns each strategy will generate in the future. The overall point is that: Value investing thrives in a brutal sideways-market environment... even one that lasts decades.

Our approach in Extreme Value is based on our price-implied expectations ("PIE") model, which gauges current stock prices relative to estimates of future growth potential.

It's not a simplistic value approach based on the metrics used in the 1990 to 2011 study. But I can easily foresee us returning to those metrics if the bear plays out like I believe it will... taking the big U.S. stock indexes down 50%, 60%, or more before it hits bottom. That would be in line with past mega-bubbles.

If the sideways-market scenario emerges, we'll likely use both the PIE model and the traditional value metrics to pick stocks. When things are rough and stocks are cheap, value investors have more ideas than they know what to do with. These days – after years of slim pickings from the value bin – that would be a welcome development.

Before we go any further, please keep in mind I'm not predicting that the market will go sideways. But I am saying it's much more likely than anybody believes today. That difference between expectation and potential reality will blindside a lot of investors over the next several years.

Good investing,

Dan Ferris

Editor's note: Investors have endured a lot of pain this year. But Dan says an investing event is about to unfold that could mean the difference between decent returns – or a total wipeout of your savings...

That's why he recently hosted a presentation where he revealed the one step that could save your portfolio. Click here to watch the replay...