Showing posts with label Best time to buy. Show all posts
Showing posts with label Best time to buy. Show all posts

Thursday 12 April 2012

When Should I Buy Stock? And how much should I buy?



Have your own personal goals.
Have a good investment philosophy and strategy.
You don't need to know everything to get started.
Seek a mentor.
Most mistakes happen early on when decisions are made on emotion and
when investment principles are not followed.
Not all mistakes will result in financial ruin.
Don't procrastinate!
You learn better while doing.

Thursday 8 March 2012

Warren Buffett: Game Pressure


Game pressure

"The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"


Read more: http://www.businessinsider.com/warren-buffett-quotes-on-investing-2010-8?op=1#ixzz1oXGjSl1y

Sunday 11 December 2011

The best time to buy shares is not about timing the market but rather about time in the market.

Many people who decide they need shares as part of their investment portfolio often hesitate when it comes to actually buying the shares; usually because they're not sure if it is the best time to buy or they feel they still have a lot to learn about the sharemarket.

The best time to buy shares is not about timing the market but rather about time in the market.  No one, not even the famous sharemarket guru and one of the world's richest people, Warren Buffett, knows whether a particular share or the market as a whole will rise or fall in the near future.  What he does know is that it will rise AND fall, and that short-term volatility does not matter as long as it rises over the medium to long term.  

You can learn about the sharemarket by observing and keeping an eye on how your shares perform under different market conditions.


Stock Performance Chart for Nestle (Malaysia) Berhad
Long term investors aim to capture an upward trend in market value.



Short term investors try to capture value from the volatility in the sharemarket.

Monday 26 July 2010

According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP.

“People like to second guess Warren Buffett, but it’s not just a flip question to ask if he should have kept his powder dry a bit longer,” Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Ram Partners LP, told Bloomberg. “He’s paid dramatically higher prices than where some of them are now trading at, so you have to wonder if he was too quick on the trigger.”

But, as a long term investor who has said that his favorite time to hold a stock is “forever,” Buffett sees things differently.

“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now,” said Buffett. “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

To support this claim, Fortune points to a long-revered Buffett metric: Total U.S. stock value versus gross national product (GNP). According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP. And right now, it does.



In late January, total stock value equated to just 75% of GNP, down from a record peak of nearly 200% in March 2000. Indeed, for most of the past decade, the ratio of stock value to GNP has ranged from 150% to 190%. That makes now an ideal time to buy. And Buffett continues to do just that.

http://jutiagroup.com/2009/02/12/warren-buffett-looking-for-bargain-prices-despite-2008-setback/

Friday 19 June 2009

The Stock Expert Who's Saying "Buy"

The Stock Expert Who's Saying "Buy"
By Selena Maranjian
June 18, 2009





Jeremy Siegel, business professor at the Wharton Business School, has given us investors a lot to learn from. He's the author, for example, of Stocks for the Long Run, and also of The Future for Investors. He's also shown us how to find great stocks and demonstrated the power of dividends.

So when he speaks, we should at least listen, right? Well, he was recently interviewed on public radio, and he advocated investing in stocks for the long haul. "In March,” he said, “we were down more than 50%. And I looked all the way back [over the] last hundred years. Once you're down 50%, your prospects are very good." That's from a guy who has spent a big part of his life studying the stock market's performance over the past 200 years.

Indeed, many well-known stocks are down 50% or more over the past 12 months:

Company
52-Week Return

Alcoa (NYSE: AA)
(72%)

MEMC Electronic Materials (NYSE: WFR)
(71%)

Valero Energy (NYSE: VLO)
(60%)

Chesapeake Energy (NYSE: CHK)
(66%)

Mosaic (NYSE: MOS)
(71%)

Caterpillar (NYSE: CAT)
(55%)

Freeport-McMoRan Copper & Gold (NYSE: FCX)
(58%)


Source: Yahoo! Finance.


One objection I have to Siegel's argument, though, is that it depends entirely on past experience projecting into the future. Think back 100 years to 1909. I know there's much to be learned from the past, but I still worry that we sometimes draw too many parallels. After all, the world was very different then. Our workforce looked different. Our industries were different. Global trade patterns were very different. Business and securities regulation was very different.

He's probably right, though
Nevertheless, I'm not betting against him. Previous bear markets have happened for a variety of different reasons, yet they've all been followed by recoveries. Sure, there's a chance that this time will be the exception. But those who've believed that in the past have gotten burned every time.

As I look at my portfolio, many of my stocks are also down substantially, and I certainly think they're more likely to recover than they are to lose more value over the long run. That's not to say that those share prices won't drop tomorrow, or even over the next year. But over the coming years, I believe these current prices will look like a bargain -- and anyone buying at current levels will be glad they did.



http://www.fool.com/investing/value/2009/06/18/the-stock-expert-whos-saying-buy.aspx





Learn more:
The Best Opportunity in 35 Years
An Opportunity to Jump On
The Next Incredible Buying Opportunity
How to find great stocks
The power of dividends.

Tuesday 7 April 2009

Has the economy turned?

Has the economy turned?
One swallow does not make a summer. But we have now had a veritable flight of the passerine birds, writes Harry Wallop.

By Harry Wallop, Consumer Affairs Editor
Last Updated: 3:11PM BST 02 Apr 2009

After 18 months of relentlessly falling house prices, the most severe financial crisis since the 1930s and the start of what is shaping up to be a brutal recession, a few green shoots have poked their heads out of the ground.

A blip? Probably, but the figures come just a few days after the Bank of England said mortgage approvals had jumped during February.

Estate Agents have been saying for months that buyers have started to come back through their doors. It's just that they don't have any funding to buy a property.

Well, maybe it's the spring weather – or maybe it's the billions of pounds of taxpayer money pumped into the system finally filtering through to consumers – but mortgage companies have started to trim their rates.

There are now a number of deals for under 3 per cent. Okay, this is six times the Bank Rate, and you will still need a big deposit to get the loan, but money is available for many people who need it, and at far cheaper rates than six months ago.

To cap it all, the FTSE 100 has climbed back above 4,000 for the first time since February.

The problem is it is sometimes difficult to tell, at this time of year, whether the shoots are your first spring peas, or a new, virulent weed.

Decisions made by consumers last year are only now hitting businesses. Job losses will continue to mount, which in turn will lead to repossessions and lower house prices.

And the tens of thousands of jobs that have been announced every week this year – even if they stopped today – will continue to cause repercussions for a good 12 months to come.

Yes, the bad news has become less relentless, but the best that can really be hoped for is that we have hit the bottom. Not that things are improving.

http://www.telegraph.co.uk/comment/5094693/Has-the-economy-turned.html

Related Articles
House prices record their first rise in 16 months
UK house prices rose in March
FTSE 100 rises past 4,000 for first time since February
House prices: What next?
UK house prices rose in March for first time since 2007, Nationwide survey shows
Green shoots in housing prices, stock market and banks, economists hope

Saturday 4 April 2009

Did You Miss the Best Week to Buy Stocks?

Did You Miss the Best Week to Buy Stocks?
By Todd Wenning March 30, 2009 Comments (20)

Ten years from now, we very well may look back and say that the first week of March 2009 was the best week to buy stocks in more than a generation.

That Monday, the U.S. government announced another bailout of AIG, and the Dow Jones Industrial Average fell 4% to 6,736 -- below 7,000 for the first time since 1997 and marking a full 50% drop from the October 2007 highs.

Breaking that psychological barrier of Dow 7,000 was apparently too much for many investors to bear.

Over $22 billion was pulled out of equity-based mutual funds over the following week, and if you flipped through some of the news stories, they were rife with capitulation from analysts. My favorite lines included:

"It's like an unending nightmare."
"Why should I step out in front of a train?"
"This is the time for hysteria."

Even the slightest contrarian investor had to perk up at such blatant bottom talk. If there was ever a time to buy when there was blood in the streets, that was the week to do it.

Pigs get slaughtered
Fast forward just three weeks and the Dow is up 17% off its March 6 lows of 6,443, and over 80% of S&P 500 members are up more than 10% over the same period. Among the biggest winners are:

Company
Price % Change (3/6/2009 to Present)

NYSE Euronext (NYSE: NYX)
26%
Corning (NYSE: GLW)
34%
Schwab (Nasdaq: SCHW)
33%
Caterpillar (NYSE: CAT)
31%
Adobe Systems (Nasdaq: ADBE)
27%
CME Group (NYSE: CME)
34%
Source: Capital IQ, a division of Standard and Poor's.

Since that first week in March, we've seen a number of positive signs from the market, including tech bellwether Oracle (Nasdaq: ORCL) beating analyst estimates and announcing its first dividend. There have also been numerous economic reports that seem to indicate an end to the free fall of prior months.

But let's not get too excited
Yes, this is only a four week period, and yes, we could certainly see more dips in the market in coming months. But this simple example is a stark reminder to remain rational and patient while those around us lose their heads.

With a little fortitude and a little cash, you can take advantage of tremendous long-term buying opportunities like we saw the first week in March. If you missed the chance to buy during the first week of March, don't panic. If this market's taught us anything, it's that we'll have another shot if we just remain calm.

To get started, begin compiling a list of stocks you'd be happy to own for the next five years and beyond. Ideally, these will be companies …

Built to last 100 years or more.
Dominating growing industries.
Helmed by committed and proven management teams.
Governed by the highest corporate values.
Consistently increasing shareholder value.



Todd Wenning shorts herd behavior, but has no position in any stock mentioned. NYSE Euronext is a Motley Fool Rule Breakers recommendation. Charles Schwab and Costco are Stock Advisor recommendations. Costco is also an Inside Value pick. The Fool's disclosure policy can get you where you need to go.

Read/Post Comments (20)

http://www.fool.com/investing/general/2009/03/30/did-you-miss-the-best-week-to-buy-stocks.aspx

Thursday 19 March 2009

Pessimism too high, time to buy: Mark Mobius

Pessimism too high, time to buy: Mark Mobius

Tags: Mark Mobius Templeton

Thursday, 12 March 2009 18:08

Veteran fund manager Mark Mobius sees a potential 20% rise in emerging market stocks in 2009 and views extreme investor pessimism as a signal to gradually start buying equities. "The danger we face now is being too pessimistic," Mobius, the executive chairman of Templeton Asset Management, a division of San Mateo, California-based Franklin Templeton Investments, said in a telephone interview with Reuters.

“We are seeing that slight bottoming out, that we have to be cautious of because if we are caught with too much cash, specifically when we are looking at very good bargains, then we are going to be in trouble with our investors,” he said.

Latin America and Asia are the two favoured regions with China and Brazil among the top country picks. Select countries such as Egypt and Turkey stand out among harder hit regions. “Eastern Europe is pretty much a disaster”. He believes China’s stimulus plan will help it achieve its 8% GDP growth target this year, helping pull up Asia which increasingly sells more of its goods to the world’s third largest economy. Brazil’s diversified economy and growing consumerism also make it attractive, he said.

Mobius manages roughly US$20 billion in emerging market assets out of the firm’s US$377 billion assets under management. Asked how high emerging market stocks might go by year-end: “If you really press me I would say 20% would not be unlikely, and the reason I would say that with some degree of confidence is that we have already come up.”

MSCI’s emerging markets stock index fell 54.48% in 2008. While the index is down 9.46% year-to-date, it has risen more than 15% from its four-year low in October. The Templeton Developing Markets Trust, the main US registered fund Mobius manages, is down 11.44% so far this year after dropping over 57.77% in 2008, according to Reuters data. Cash levels for his portfolio fluctuate between the preferred level of zero and 7% he said. He characterises them as “normal, or certainly not higher than normal”. During the 1997–98 Asian financial crisis, cash levels in his funds reached 20%.

While market volatility may not be over, a market bottom could be in place, Mobius said when asked at what point in the next 12 months investors might claim they’ve cleared a hurdle. “I’m saying that now. I'm feeling that now because of the incredible pessimism that you see everywhere. That usually is a pretty good sign that we are over the hump,” he said.

“Almost universal pessimism is usually a very good time to be buying equities because equities lead the economy,” by six months to a year he said. Famous for his globe-trotting and “on the ground” research, Mobius said of a recent trip to Latin America that while companies were preparing for the worst, customer orders were still coming in and “a lot of them” are maintaining steady investment programmes.

“On the ground things look OK but with a slower pace. That is on the investment side. The valuations now are very very attractive, even if we do a big markdown on earnings,” he said.


Thursday, 12 March 2009 © 2009 - The Edge Singapore


Last Updated on Tuesday, 17 March 2009 11:52
http://www.theedgesingapore.com/blogsheads/1017-the-edge-2009/2954-pessimism-too-high-time-to-buy-mark-mobius.html

Wednesday 21 January 2009

Advice for Uncertain Times

Ben Stein How Not to Ruin Your Life

Advice for Uncertain Times
by Ben Stein
Posted on Tuesday, January 20, 2009, 12:00AM

The night before Dr. Martin Luther King, Jr., was assassinated in Memphis, he gave a memorable, inspiring speech. At its end, he said, "I don't know what's going to happen with me now. We've got some difficult days ahead...."
Unfortunately, this is true now about the American (and global) economy. I wish I could say I knew what was going to happen in the future. I have learned that I do not. I was not given the gift or the burden of foresight. I thought that our government would not let the bottom fall out. I was wrong. I am sorry.
So given that I do not know the future, what can I tell you that will be useful? Actually, quite a bit.
Cash Really Is King
First, taking the advice of my dear pal Ray Lucia, rock and roll star and investment guru, I can tell you that, no matter what happens, it will be good to have a nice chunk of money in cash or near cash. Yes, I know we may soon have inflation. But if we do, the rates on money market funds will rise. Cash is just a lovely thing to have in almost situation. Cash or near cash offers a level of comfort that even a large portfolio of stocks does not offer.
Taking a cue from my dear pal Phil DeMuth of Conservative Wealth Management, I can tell you that, if you think we are definitely at a bottom, you might be fooled. While Phil's research tells us that we may be near a bottom by postwar metrics of price, price to earnings, and price to dividends, we may have ( as Phil puts it ) "jumped the tracks of history."
My own view is that we have been fooled so much in the past 15 months about what real earnings are, what real book value is, that we cannot trust the data given to us. Yes, by current price-earnings measures, stocks look fairly reasonable. But we don't really know what true earnings are. That is the vicious truth. So if we are in the quicksand of not being able to rely on the data our companies give out, then anything can happen. Yes, we may be at a bottom or near it. Or we may not be anywhere near a bottom.
Anything Can Happen
Just to illustrate, who would have dreamed a few weeks ago that Citi would be in the kind of trouble it is in, even after a $45 BILLION infusion from the federal government? Anything can happen in the treacherous world in which we find ourselves.
Third, taking counsel from my pal Barron Thomas, very possibly the best salesman on the planet, I will tell you a rule of indisputable value in this or any economic situation: WORK.
Barron is in the real estate and private plane businesses. These are both highly impacted by the economic slowdown. How does Barron deal with it? He gets up at 5 a.m. every day and works the phones from 7 a.m. to 7 p.m., goes home, makes notes, and then sleeps well until he starts all over again. And he closes the deals. There are still plenty of people who will make the deal at the right price.
Keep on Working
Next, from yours truly: Work is deeply therapeutic. It makes us feel better. It gives us a much better attitude about ourselves. It makes us feel as if we are worth something. A middle class person who works has a far better self image than a rich person who does not work. Work is a gift, a sacrament, a true blessing. Plus, people who work are generally going to have higher incomes and higher standards of life than people who do not work.
If times are tough, work harder than ever. You will get through the rough patches and learn how strong you really are. Do not seek to avoid work -- embrace it.
Then, finally, I will tell you something I do when I feel buffeted by the markets. I dig into the 12-step program that has saved my life for the past 20 years. Using its precepts, I say to myself, "I am powerless over the stock market. It is all up to God. I do the very best I can, and after that, it's up to God."
Know What's Important
If you don't believe in God, then you can substitute "fate." Powerlessness is a huge source of power. Try it. You will like it.
"We shall overcome," we used to sing at civil rights demonstrations when we were getting tear gassed. "We are not afraid." Now I lie in bed at night and say to myself that if the men and women at military hospitals in this country and abroad can get through what they do, if their families can go through what they go through, then I can deal with market volatility -- trivial by comparison.
And so -- here it is. I do not know how it -- the stock market and economic turmoil -- will end, but to paraphrase The Bard, it will end, and that suffices.

http://finance.yahoo.com/expert/article/yourlife/135453

World economy 'close to the bottom' of liquidity cycle

World economy 'close to the bottom' of liquidity cycle
Morgan Stanley has begun to detect early signs that the global economy may be nearing the bottom of the cycle.

By Ambrose Evans-PritchardLast Updated: 9:27PM GMT 18 Jan 2009
It is advising clients to ignore the deep gloom in the markets and focus on deeper fundamental forces as a fresh phase of liquidity gathers strength. However, it is still too early to buy stocks.
"Excess liquidity has started to rise again in the G5 (US, Japan, Germany, Britain and France) for the first time inalmost three years," said Joachim Fels, the US bank's research chief.
"In our view, this marks the beginning of a new global liquidity cycle in 2009. It is driven by unprecedented easing of monetary policy as well as the gradual healing of impaired financial systems."
Dr Fels uses a complex recipe to measure the excess money sloshing through the world's financial system. This is how each long cycle of rising asset prices first builds a foundation.
"As in past episodes, excess liquidity will find its way into asset markets. To some extent, this has already started to happen, with government bond yields having been pushed to new lows, credit spreads coming in and equities having bounced off their lows from last Autumn."
The bank favours corporate credit at this stage rather than government bonds. It likes emerging markets such as the BRICS – Brazil, Russia, India and China – rather than equities in the old world.
Dr Fels says liquidity is the key driver of asset booms and busts. It drove the bond rally in the early 1990s and the dotcom bubble in the late-1990s.
Morgan Stanley said investors must monitor the entire global liquidity picture to understand what is going on in today's cross-border markets.
Teun Draaisma, the bank's European investment guru, said stocks tend to rally roughly six months before the US property market touches bottom in each cycle – although that is not what occurred in the relatively modest housing slide in the early-1930s.
By this measure, it is still too early to take the plunge in the stock markets. His team expects US house prices to keep falling until the middle of 2010, dropping a total of 46pc from peak to trough. They are down 24pc so far.
"Patience is the golden rule in bear markets, and the bigger the crisis, the more patience is required," he said.

http://www.telegraph.co.uk/finance/globalbusiness/4284602/World-economy-close-to-the-bottom-of-liquidity-cycle.html

Tuesday 6 January 2009

WSJ to Warren Buffett: "Time to Get a New Crystal Ball"

Monday, 27 Oct 2008
WSJ to Warren Buffett: "Time to Get a New Crystal Ball"

Posted By: Alex Crippen
Topics:Derivatives Investment Strategy Stock Market Warren Buffett
Companies:Berkshire Hathaway Inc.

MORE DOUBTS ABOUT THE ORACLE

........... there's are other Buffett-doubters out there, especially when it comes to his public call to buy U.S. stocks now.
A common theme is that as a billionaire, Buffett can afford to put his money down now and wait for the profits, which could be years away. The rest of us have more pressing problems.
In the Times of London, Jennifer Hill argues that Buffett Is Wrong: The Market Madness Is Still Far From Over.
In Canada, the National Post's Diane Francis echoes the sentiment with Buffett Is Wrong: Avoid Stocks and Buffett Is Wrong: Part II.
On Seeking Alpha, Brian Keith Anderson lists 5 Reasons to Ignore Buffett and C.S. Jefferson asks "What If Warren Buffett Is Wrong About the Markets?"
There are also defenders, of course, including the often pessimistic Doug Kass, who made a profitable short-term bet against Berkshire Hathaway's stock price this year.
The key question, as it often is when talking about Warren Buffett and his famously long-term view of things, is whether an investor sees enough future pleasure to overcome pain in the present.
Buffett's investing record suggests we should be looking very carefully.

http://www.cnbc.com/id/27400058/

Wednesday 17 December 2008

Now is the perfect time to invest

Mutual Funds12/16/2008 12:01 AM ET

Now is the perfect time to invest

It's tempting to stay on the sidelines of a turbulent stock market, but you should take advantage of today's rock-bottom prices. Here's why -- and how.

By Tim Middleton

The 2007-08 bear market has been the worst since the Great Depression, more savage than that of 1973-74, which most of us remember only dimly, if at all, and 2000-02, which we remember all too well.
What's more, the combination of two deep bears in less than a decade has poisoned many people against common stocks. The Standard & Poor's 500 Index ($INX) has gone down an average of 0.9% a year over the past 10 years, from November 1998 through November 2008. Given this sobering lesson, who would want to own these things?
You would.
Whether you're just getting started as an investor or rebuilding a portfolio shattered by the recent chaos, you need to remember that how well you do depends on what you pay at the outset. And prices now are at rock bottom.
"Today, in my view, the stock market is presenting you with one of the great buying opportunities of your lifetime -- perhaps the greatest," says Steve Leuthold, the manager of the Leuthold Core Investment (LCORX) fund, which ranks in the top 2% of similar funds over the past 10 years. "Buy 'em when they hate 'em."
Since this bear market began 14 months ago, virtually every asset class, from foreign and domestic stocks to commodities to real estate, has been driven down at least 50%. Even among bonds, only U.S. Treasurys have held up well. The benefits of diversification, in short, have proved to be illusory.
But that doesn't mean -- in the words every market loser has uttered -- that this time it's different.
"The importance of asset allocation, the insidious power of inflation, diversification using uncorrelated asset classes and long-term stock market performance still exist," says Michael L. Kalscheur, a financial consultant with Castle Wealth Advisors in Indianapolis. "Most people are looking at the most recent information and assume that's how it will always be. It will not always be this way."
Whether you're building a portfolio or rebuilding an old one, the tried-and-true lessons still apply: Balance risks against each other while relying on equities to build wealth. If you have become increasingly defensive over the past year -- and most people have -- now is the time to reverse the process.
How much worse could it get? I believe the bear market is over. But say I'm wrong and it's not. Having fallen more than 50% already, just how much further can stock prices fall? How much risk remains?
Junk bonds are yielding 22%, nearly twice their historical average. Since the vast majority of corporate bonds are rated junk, do you really believe more than half of the American private sector is going to go broke? That didn't happen even in the Great Depression.
Here is what you should not do in the coming year: Wade cautiously back into risky markets such as stocks, dollar-cost averaging your way back to a normal, stock-heavy portfolio.
This is the time to plunge. Dollar-cost averaging is almost never a good idea, as I explained in a recent column, but it's a really lousy idea right now.

That's because stock market recoveries tend to be front-loaded. Since 1900, according to Leuthold's research, "the median first-year price gain of 40.9% represents almost half of the median 83.6% total bull market gain for the Dow." Gains in the first three months are the sharpest of all, averaging just over 18%.
So take the money you've got to invest -- all of it -- and build (or rebuild) your portfolio today.
By the way: I'm doing this myself in my own portfolio, and subscribers to my newsletter, ETF Insider, have already done it, effective Dec. 1. Since bonds have remained positive throughout the bear market, we had profits in them, which we trimmed. We added that to the cash hoard we had built up when we cut back on our riskiest positions earlier in the year, and we swapped nearly everything into foreign and, primarily, domestic stock funds. We also bolstered our holdings of emerging market stocks and commercial real estate, which had been beaten down the most.
Continued: Building your portfolio
Building your portfolio How you allocate your assets is the most important decision you will make in terms of future returns. That, rather than individual-security selection, accounts for 90% of total portfolio returns.
The most attractive asset classes on a total return basis are:
Domestic small-capitalization stocks.
Domestic large-cap stocks.
Emerging-markets stocks.
Foreign developed-market stocks.
Since an investment portfolio is long term by its nature -- money you need in only a few years should be protected in Treasury bills and short-term bond funds -- at least 50% of it should be apportioned among these groups. And for Mr. or Ms. Typical Investor, I would make this equity allocation 75%.
Stocks provide the most reliable mixture of potential for capital growth and protection against inflation. For young investors, my allocation recommendation would be 100%, and indeed that's where two of my three children have their investments. (The third may buy a home soon and so holds a considerable portion in bonds.)
The most attractive assets for diversifying risk in a stock-heavy portfolio are:
Domestic high-quality bonds, particularly mortgage and corporate bonds.
Foreign high-quality bonds.
Domestic commercial real estate, in the form of funds that invest in real-estate investment trusts, or REITs.
Commodities, notably energy.
Cash, in the form of T-bills or money market accounts.
In taxable investment accounts, municipal bonds take the place of corporate, U.S. government and mortgage bonds. Munis are particularly cheap right now, yielding far more on an after-tax basis than taxable bonds.
During periods of high inflation, Treasury inflation-protected securities, or TIPS, can take the place of at least some of the high-quality bond allocation. That's not the case now, however.
Assuming you have 75% of your assets in equity funds, I would allocate the balance like this: 5% in a commodity/energy fund, 5% in REITs and 15% in domestic high-quality bonds such as Pimco Total Return (PTTRX), the most widely held such mutual fund.
I wouldn't own foreign bonds at the moment because the U.S. dollar is rallying, and currency translations are therefore increasingly unfavorable. For the same reason, I would be light on foreign developed-market equities -- but not emerging markets, where currencies play less of a role.
Both energy and REITs are down much, much more than stocks in the current market, so you could snap up real bargains there.
Higher returns ahead If you think this plan is too risky, think again. Just as relatively low stock returns this decade could have been predicted (and in fact were, by Warren Buffett, among others), based on extreme out-performance in the 1990s, relatively high returns going forward are almost reflexive. This cycle is known as reversion to the mean, and the mean returns of stocks over long periods are in the low double digits.
"History shows us that after a substantial bear market, we can expect the returns of equities to be higher in the near term," notes Tom Adams, a financial adviser with Mentor Capital Management in Elmhurst, Ill.
Having pointed out the negative returns of stocks over the past 10 years, Leuthold tracked the history of stock performance in every 10-year period in which the market averaged an annual gain of 1% or less. Then he looked at the succeeding 10 years. The worst performance in those periods was a gain of 101% between 1938 and 1948. The best was a surge of 325% between 1974 and 1984. The average was 183%.
Buffett, so negative on stocks as this decade began, has lately become outspokenly bullish. No investor in our lifetimes has proved more adept at understanding the market.
So whether you are new to investing or renewing your commitment to it, you have chosen a very favorable time. Don't dally. Your financial future depends on what you do now.

At the time of publication, Tim Middleton didn't own any fund mentioned in this article.

http://articles.moneycentral.msn.com/learn-how-to-invest/now-is-the-perfect-time-to-invest.aspx?page=all

Sunday 14 December 2008

Welcome to a buyer's market without buyers

Joe Investor, the Markets Are All Yours Now
By JASON ZWEIG
Article
Video

The tables have turned.
For the past couple of decades, the markets have been dominated by institutional investors who devoured bargains so fast and in such bulk that individual investors were usually left, at best, with a few scraps.
But pension funds, hedge funds, mutual funds and other institutions are under siege as their portfolios implode and investors redeem their shares, forcing the fund managers to raise cash.

Advantage Goes to the Individual Investor

Personal Finance columnist Jason Zweig explains why individuals have a big advantage over institutional investors in the market right now. (Nov. 14)

Virtually every investment that carries any risk is on sale. Stocks and bonds, at home and abroad, have had their prices slashed by up to 45% this year. Yet at the very moment when bargains abound, many of the giants who normally would buy can do nothing but sell.

Welcome to a buyer's market without buyers.

This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price."
You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing. Sooner rather than later, institutions will no longer need to beg for cash, they will regain the upper hand over individuals, and the tables will turn again.
While blue-chip stocks are still cheap, as I've said many times lately, there are some areas where the liquidity drought borders on desperation.

Corporate bonds.

A year ago, corporate bonds outyielded Treasurys by 1.6 percentage points; now, the spread is more than five. Top-quality corporate debt is yielding 7% and up. Consider cheap, well-run funds like Harbor Bond, Loomis Sayles Bond or . Convertible bonds are yielding 12% and more; here, the easiest choice is Vanguard Convertible Securities.

Municipal bonds.

The tax-free securities issued by state and local governments have gotten so cheap that in many cases you would have to earn 7% or 8% before tax to match their yield. Vanguard, T. Rowe Price and Fidelity offer a wide range of muni funds at low cost.

Emerging markets.

Stocks and bonds in the developing world have been decimated. Emerging-market stocks have fallen nearly 60% in 2008. The bonds have dropped about 20%, producing the highest yields in about a decade. For stocks, Vanguard Emerging Markets ETF is a good choice; T. Rowe Price Emerging Markets Bond fund is a solid way to play the debt.

TIPS.

Larry Swedroe of Buckingham Asset Management in St. Louis recently bought 8-year Treasury Inflation-Protected Securities with a yield of 3.7%. "That is crazy," he marvels, since the same day the 5-year TIPS yielded 2.6% and the 10-year yielded 2.7%. Such fat yields in excess of inflation on a risk-free investment are a rare opportunity. Put TIPS in a tax-free retirement account; learn more at www.treasurydirect.gov.

Closed-end funds.

These neglected fund/stock hybrids are at their cheapest in years. Closed-ends often trade at a discount to the market value of their holdings. In many cases, you now can get $1 in assets for 85 cents. That augments the yield on funds that hold corporate or municipal bonds. A handy starting point for research is www.closed-endfunds.com. Be sure the fund is "unleveraged," meaning that it does not borrow money, and avoid any fund with annual expenses over 1%.

Real estate.

REITs, or real-estate investment trusts, have been gutted in the housing crisis, losing more than 40% so far this year after an 18% drop in 2007. Many REITs are now priced as if people and businesses will never again want roofs over their heads. The safest choice: a basket holding dozens of real-estate bundles, like Vanguard REIT Index fund.

Finally, if you have cash and courage, consider a vacation property or second home. Nearly two-thirds of the condominiums built in and around Myrtle Beach, S.C. during the boom remain unsold as of June, says the National Association of Home Builders. A similar supply glut has clogged markets in other getaways like Tampa, Fla., and San Diego. With due diligence, you could get both a high financial and a high psychic return.
Email: intelligentinvestor@wsj.com.

Friday 12 December 2008

Recent tulmultuous events provided great opportunity

How to keep your head when people all around you are losing theirs...

Morningstar FundInvestor:
Your roadmap to the best funds to buy, sell, and watch.

Dear Investor,

It's no secret that this is a frightening market. Watching the devastating effects of the financial meltdown and widespread panic scare me, too. But I also think the tumultuous events have provided savvy investors with a great opportunity.

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I'll guide you to the best managers--those who invest more than one million dollars in the fund they manage--and steer you away from the over hyped managers. I will also provide insights into companies that are a good steward of your funds and name names of those that are not.

So tune out the panicky doomsayers on television and invest in some of the best funds around. Don't throw up your hands and give up on investing. With the downturn in the market, there are more funds available than ever before.

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Morningstar FundInvestor

http://www.morningstar.com/Products/Store_FundInvestor.html

Monday 8 December 2008

Five tips for buying stocks in bad times

WEEKEND INVESTOR
How to outsmart a not-so-average bear
Five tips for buying stocks in bad times

By Jonathan Burton, MarketWatch
Last update: 7:01 p.m. EDT Oct. 17, 2008

SAN FRANCISCO (MarketWatch) -- You survived the stock-market crash of 2008. Congratulations. Now comes the hard part: Buying stocks and mutual funds that can survive -- and even thrive -- in the bear market.

Buying in a bear market? That's what Warren Buffett is doing. The famed investor was blunt about why: "Be fearful when others are greedy, and be greedy when others are fearful," he wrote in an opinion piece Friday in The New York Times. "Bad news is an investor's best friend," he added. "It lets you buy a slice of America's future at a marked-down price." Read Buffett's editorial.

The key, as always, is what you buy and how patient you are. Buffett isn't banking on a quick turnaround; he knows that patience is rewarded. You can average in to stocks over time -- there's no reason to back up the truck. Markets are bracing for another shock: the specter of the first consumer-led recession in almost two decades.

"This volatility is signaling the end of an era," said Rich Bernstein, chief investment strategist at Merrill Lynch. "If you're picking stocks or looking for a fund, the characteristics you want are the ability to continue to enhance shareholder value. Think of it in terms of companies that are self-funding. Look for companies that have excess cash flow."

Let that be your bear-market investing guide. You want an investment portfolio of high-quality stocks and mutual funds that not only can weather this economic storm but come through it stronger.

That naturally steers you to traditionally defensive consumer staples and health-care companies, but don't limit yourself. There will be opportunities in other sectors, but the new leaders, regardless of their business, will demonstrate the financial strength and self-sufficiency to flourish in what will be an increasingly Darwinian market.

So think like an acquirer; think like Buffett. Keep the following five criteria uppermost in mind when you evaluate a stock or the companies in a fund's portfolio:

1. Free cash flow
Free cash flow is essentially a company's budget surplus. Excess cash -- not earnings -- is for many investors the true measure of a company's flexibility because unlike earnings, cash flow is tough to fudge with accounting tricks.

"Look for strong and growing free cash flow," said Rob McIver, co-manager of Jensen Portfolio (JENSX ) . "Cash flow is harder to manipulate than earnings per share."

To calculate free cash flow, take net income plus amortization and depreciation, minus changes in working capital and capital expenditures. Companies with excess cash have options. They can invest in the business or make acquisitions, and give investors a boost by increasing dividend payments and buying back shares.

Many of the 28 stocks in the Jensen fund are large-cap consumer goods and health care companies fitting this bill. Top holdings as of Sept. 30 included medical-device giant Stryker Corp. (SYK) , pharmaceutical leader Abbott Laboratories (ABT) and consumer products titan Procter & Gamble Co. (PG) . The fund also has a newer position in software developer Cognizant Technology Solutions (CTSH) .

Said McIver: "There's a place in everyone's portfolio for high-quality companies where predictability and sustainability of earnings is valued."

2. Little or no debt

The most profitable areas for much of this decade -- real estate, energy, financials, commodities, emerging markets -- all benefited from cheap and easy credit. Now credit is not readily available and not so cheap. Accordingly, credit-sensitive sectors are underperforming.

"Companies that are levered or need to tap the capital markets are going to struggle in terms of being able to get financing at a reasonable price -- or at all," said John Buckingham, editor of The Prudent Speculator newsletter and manager of the Al Frank Fund (VALUX) .

Concentrate on companies that can finance their own growth and have low debt as a percentage of total capital. Organic growth, as opposed to growth through acquisition, is also crucial.
"Focus on balance sheet strength," Buckingham said. "We like Microsoft (MSFT) because it doesn't need to tap the capital markets." Big blue-chip technology companies such as Cisco Systems Inc. (CSCO) and Oracle Corp. (ORCL) "are excellent places for investors," he added.

In a market where cash is king and earnings predictability is paramount, Buckingham is also bullish on big pharmaceutical companies including GlaxoSmithKline Plc (GSK ) and Merck & Co. (MRK) and health insurers Aetna Inc. (AET) and Humana Inc. (HUM)

"The important thing," Buckingham said, "is does the company have the ability to navigate the difficult environment we're in or does it have to go to the markets for capital, and the markets are not exactly friendly right now."

3. Strong market share

Companies involved in basic businesses with a national or global footprint, or that help other companies be more productive have a competitive advantage in a miserly market. Marshall Kaplan, senior equity strategist with Smith Barney Private Client Investment Strategy, uses the example of oil service companies that can charge a premium for extracting oil and gas, or technology companies that make it easier to process data.

"Ask yourself, is it a viable franchise?" Kaplan said "Are you talking about products and services that are going to be needed not for brief periods but over the long term? Is the quality of earnings there? You've got to make sure you're in a situation where the business can be maintained at levels that are conducive to growth."

Stocks on Smith Barney's recommended list that meet this criteria include Apple Inc. (AAPL) , ConAgra Foods Inc. (CAG) , Johnson & Johnson (JNJ) , Kimberly-Clark Corp. (KMB) and National Oilwell Varco Inc. (NOV)

"It's tough for the individual investor to keep his or her head about them in a market like this," Kaplan said. "These types of names create a stronger level of support. The days of buy-and-hold, one-decision stocks are gone, but you could have a longer holding period in the names with these characteristics."

4. Solid management

Companies in top financial shape have management that's proactive and capable.

"Honorable," is how McIver, the Jensen fund manager, puts it.

"Understand what creates and what destroys shareholder value," he said. "You can't run a company from quarter to quarter to meet earnings targets. You have to make long-term decisions and capital expenditure decisions that will reap rewards."

The Jensen fund won't invest in a company until the managers visit executives on their home turf. Moreover, these corporate chieftains must have delivered return on equity -- net income divided by shareholders' equity -- of at least 15% annually on average for 10 consecutive years. One slip, and the stock is booted from the portfolio.

"By knowing the companies well, we can minimize business risk," he said.

5. Attractive valuation

Investors have tossed out stocks in panic, including those with strong fundamentals. Market sentiment is mired somewhere between despondency and ye of little faith.

But many professionals are taking a page from Buffett. "I'm looking for stocks that are already cheap," said Tom Forester, manager of Forester Value Fund (FVALX ) , which counts consumer goods leaders H.J. Heinz Co. (HNZ) , Kraft Foods Inc. (KFT) and Johnson & Johnson among its top holdings. "They tend to have a lot less downside, but they also have plenty of upside potential."

He's also finding bargains in technology. "I'll buy Microsoft at 12 times earnings," Forester said. "For a tech stock it's very cheap. I like the cash, the stock buybacks, and revenue streams are steady."

Buckingham's picks include General Electric (GE ) , United Technologies (UTX) and IBM (IBM) . "There's a lot of opportunity in large-cap stocks right now," he said, "and arguably you've got a greater margin of safety."

In this market, investors will need the margin of safety that a low price brings. The crash was just the end of the beginning. Now comes what could be many months of head-fakes and hopeful rallies that wind up in dead ends. You'll be Charlie Brown charging the football with head held high, only to land flat on your back.

While it won't make the challenges any easier, take to heart what veteran stock analyst Bob Farrell noted in his iconic 10 "Market Rules to Remember": Bear markets, he wrote, have three stages -- "sharp down, reflexive rebound, and a drawn-out fundamental downtrend." See related story.

Where it stops, nobody knows, but a portfolio with strong defensive stocks stands a fighting chance.

Jonathan Burton is an assistant personal finance editor for MarketWatch, based in San Francisco.

http://www.marketwatch.com/news/story/you-can-buy-bear-market/story.aspx?guid=%7b61CFDC64-F688-4C93-8C88-010A83AEECF0%7d&print=true&dist=printMidSection

How You Can Rebuild Your Wealth

Investments

How You Can Rebuild Your Wealth

History shows that the best way to rebuild portfolios is to stay in the stock market. Over the past nine recessions, the Standard & Poor's 500-stock index has gained 13%, on average, during the second half of a downturn and another 13% the year after it ended.

"This is likely to be one of the best buying opportunities, if not in the last decade, then in the last century," says financial planner Harold Evensky.

Strategists favor cash-rich blue chips in defensive sectors like consumer staples and health care, and technology giants. Exposure abroad also will be crucial to rebuilding wealth. Among foreign markets to watch, veteran global managers cite Japan, China, Brazil and parts of Europe outside the U.K. and Spain. (Both of these countries face their own real-estate woes.)

But it's worth keeping a portion of your portfolio in cash and bonds just in case; planners such as Mr. Evensky are keeping at least 15% in cash for their clients. For now, limit bond exposure to shorter-term, high-quality issues.

Additionally, you can ward off inflation concerns, which many economists expect will re-emerge in a year or two, by purchasing Treasury Inflation-Protected Securities, or TIPS.

http://online.wsj.com/article/SB122862515245785795.html

Sunday 7 December 2008

Is Buffett Insane?

Is Buffett Insane?
By Richard Gibbons November 28, 2008 Comments (38)

In the midst of economic chaos, Warren Buffett recently made a bold prediction. He said that now is the time to buy American stocks.

Of course, this call seems utterly insane. Banks are failing, the credit markets are deadlocked, unemployment is skyrocketing, and there's likely to be terrible news for months.

On the other hand, this is Warren Buffett, and he's made these sorts of predictions before.

1974: Stagflation

The years 1973 and 1974 were two very bad ones for the market. OPEC had started flexing its muscles, causing oil to quadruple. This resulted in a long recession, with inflation spiking to 12.3% in 1974, while real GDP growth fell by 0.5%. America experienced stagflation -- the ugly combination of a recession and high inflation rates -- and people were terrified. The situation was even worse in the United Kingdom, where the government was bailing out banks after real estate crashed. Over those two years, the S&P 500 plunged by 42%.

It was then, on Nov. 1, 1974, at the height of the pessimism, that Buffett made his first well-publicized bullish market call. He noted that he was well aware that the world was in a mess, but that stocks were simply too cheap. "If you're only worried about corporate profits, panic or depression, these things don't bother me at these prices."

To be totally clear, Buffett made one of the most direct predictions of his entire career: "Now is the time to invest and get rich." Buffett himself was buying shares of The Washington Post (NYSE: WPO) and advertising agency Interpublic (NYSE: IPG).

It worked out pretty well for him. The market jumped 32% in 1975, and another 19% the next year. Even today, the Dow Jones Industrial Average's 38% gain in 1975 stands up as its biggest increase since 1955.

1979: An oil crisis

That excellent performance was followed by two poor years. Once again, we were experiencing double-digit inflation and falling GDP growth. Again, we were going through an oil crisis, this one coming in the wake of the Iranian Revolution. As a result, when Buffett made his next call on Aug. 6, 1979, the Dow Jones Average was actually trading lower than it was at the end of 1975.

This time, Buffett noted that stocks were far more attractive than bonds. He believed that pension managers, who were piling into bonds yielding 9.5%, were investing using the rearview mirror. They were avoiding the equities that had recently lost them money. But Buffett recognized that the underlying businesses were actually performing well. A combination of falling stock prices and improving business fundamentals made stocks an attractive investment.

Buffett figured that stocks were probably offering long-term returns of 13% or better. He bought oil producer Hess (NYSE: HES), GEICO, and General Foods, which later became part of Kraft (NYSE: KFT).

This time, Buffett's timing wasn't perfect -- the S&P 500 fell a bit more over the next few months. But his long-term prediction was spot-on. During the 1980s, the S&P 500 rose 13% annually before dividends.

1999: The Internet bubble

In November 1999, during the height of the Internet bubble, Buffett made his only bearish call. At the time, the market was in a speculative fervor, with Internet stocks showing huge price increases seemingly every day. In the five years between 1995 and 1999, the S&P 500 tripled, with compound annual returns of 26%. Many considered Buffett a relic for refusing to buy into the technology boom.

Buffett, however, noted that, because of a combination of cheap initial valuations and falling interest rates, stocks had achieved unprecedented annual returns of 19% over a 17-year period. These results made investors unreasonably optimistic. New investors were expecting 10-year annual returns of 22.6%, while even experienced investors predicted 12.9%. But the huge boom was only supported by modest GDP growth, and therefore wasn't sustainable. So, Buffett expected about 4% real returns.

He continued to hold Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC), and M&T Bank (NYSE: MTB), though he noted in the 2004 annual report that he should have sold some of Berkshire Hathaway's overvalued holdings.

Buffett's bearish prediction proved optimistic. The market continued to rise for a few months, with the S&P 500 topping out 9% above where it was when Buffett made the call. But that was followed by a crash. Since his call, the S&P 500 has dropped by 39%, for average annual losses of about 5%, well below Buffett's estimates.

The Foolish bottom line

The common theme of all these predictions is that Buffett didn't care about short-term fears. He wasn't worried about stagflation in the 1970s, and he didn't buy into the unrealistic optimism of the late 1990s. Instead, he rationally valued stocks, and made the right long-term calls. His biggest mistake was the 4% number he threw out in 1999 -- long-term returns have been much worse than his bearish prediction.

But that prediction was too optimistic partly because stocks are so unreasonably cheap right now. And that's why Buffett's buying today.

If you're a short-term speculator, now is a bad time to gamble. But if you're truly in it for the long term, Warren Buffett has made the call. He thinks stocks are cheap. And we agree with him.

Our Motley Fool Inside Value team is astounded at the bargains that we're finding right now. You can read about them by taking a 30-day free test-drive.

Fool contributor Richard Gibbons is terrified, but still thinks this is the time to invest and get rich. Kraft is an Income Investor recommendation. Coca-Cola and Berkshire Hathaway are Inside Value picks. Berkshire Hathaway is also a Stock Advisor selection and Motley Fool holding. The Fool's disclosure policy predicted a McCain victory.

http://www.fool.com/investing/value/2008/11/28/is-buffett-insane.aspx

Monday 17 November 2008

Is it time to get back into the market?

Fear index shows its time to buy
By David Uren November 17, 2008 12:00am

Some experts are saying its time to get back into the market
But more economic pain is in store

Markets: The latest trading news and share prices
AFTER each thumping day of share market falls, a few hopeful investors open their wallets and, following Warren Buffett's dictum to "be greedy when others are fearful'', buy a few stocks.
Often as not, they are thumped again the next day, but sooner or later, the wisdom of hindsight will illuminate their vision, The Australian reports.

If you accept the latest economic forecasts from either Treasury, or the more pessimistic ones from the Reserve Bank, the time to buy is now. An outlook in which the economy slows this year and next to somewhere between 1.5 to 2.25 per cent before rising back above 3 per cent in 2010-11 will soon reveal that stocks have been over-sold.

These forecasts imply little growth in profit, but no great falls over the next 18 months or so, with a return to robust growth thereafter. It is the uncertainty around those growth forecasts that is the problem.

Since the beginning of this year, every time anyone revisits their economic forecasts, they have been revising them down.

There was barely four weeks between the last two sets of downward revisions by the International Monetary Fund and then only a week before the OECD put out some even more pessimistic numbers.

So far, all Australia has seen is a lot of market action that has made people nervous. Shares have plunged, and the less visible money markets have been volatile beyond precedent.

That market punishment has been stretched out over the better part of a year, but there has been little real economic fallout, at least in this country.

Treasury secretary Ken Henry could put the telescope to his eye last week and, looking backwards at the 4.3 per cent unemployment rate and 11 per cent growth in gross company profits in the June quarter, declare that Australia had little to fear from the economic squalls ahead.

The Reserve Bank, which has long been a fan of equities, published the first chart in its quarterly economic review last week, showing that the share market has now taken values far below their long-term average relationship with profits. This is so, whether the comparison is with historic earnings or analysts' projections of future profits.

The second chart, prepared by University of California professor James Hamilton, makes the same point for the United States market, but over a 130 year time span.

He says the academic literature has established that the ratios of price to earnings and dividends to earnings do not wander too far from their long-term historical averages.

"The implication of that finding is that when prices are high relative to dividends and earnings, you can expect below-average stock returns,'' he says, and vice versa.

At present, with price earnings ratios below the long-term average, superior long-term returns are to be won.

A similar point was made recently by the Reserve Bank's deputy governor, Ric Battellino. The prospective earnings yield on Australian shares now stands at 11 per cent, almost double the long-term average.

"When the yield has risen to these levels in the past, the return on shares over the subsequent 10 years has almost always been well above average,'' he says.

The damage to the real economy is coming. We're seeing it around the world as lay-offs mount, industrial production slumps and one economy after another records quarters of contraction.
It is certainly true that the Australian economy has some insulation. It enters the economic downturn with a strong budget surplus and high corporate profitability. The floating exchange rate provides a buffer, and will help to extend the last gasp of the commodities boom.

Some of these strengths may prove ephemeral, however. Profit levels are the most obvious.
Gross profits have reached a record 27.8 per cent of the economy, a long way north of the long-term average of 20.0 per cent.

Read the full article at The Australian.

Saturday 25 October 2008

How Low Can Stocks Go?



How Low Can Stocks Go?
http://www.fool.com/investing/value/2008/10/18/how-low-can-stocks-go.aspx

Morgan Housel

October 18, 2008

Between Oct. 6 and Oct. 10, the Dow Jones Industrial Average dropped nearly 2,000 points. If it kept falling at that rate, the index would hit zero in less than a month.

Of course, we won't see zero. No matter how ugly markets get, the pain we saw these past few weeks can't continue for long.

But here's the bad news: Zero may be out of the question, but that doesn't mean stocks won't plummet from here. In fact, they could fall much, much further.

And history agrees.

What goes up ... The history of long-term market downturns is pretty abysmal. When times are bad, markets don't just get drunk with fear -- they start downing vodka shots of fear.

At times like this, nobody wants to own stocks. Their palms begin to sweat every time they watch CNBC. They bury their heads in the hope that the pain will go away. They throw in the towel and sell stocks indiscriminately. In short, it gets ugly.

Just how ugly? Have a look at the average P/E ratio of the entire S&P 500 index over these three periods of market mayhem:

Period
Average S&P 500 P/E Ratio
1977-1982....8.27 times
1947-1951....7.78 times
1940-1942....9.01 times

Compare that to the average P/E ratio today of around 20 times and a seven-year average of more than 24 times, and it's pretty apparent that stocks could fall much, much further than they already have, just by returning to the lows they historically hover around during downturns.

Assuming earnings stay flat, revisiting those historically low levels could easily mean a nearly 50% decline from here. For the Dow Jones Industrial Average, that'd correlate to roughly Dow 5,000 -- give or take. Of course, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history.

But what if it did happen? What would happen to individual stocks? Here's what a few popular names would look like trading at P/E ratios of 8:

Company
One-Year Decline ...... Further Decline From Current Levels With P/E of 8

Yahoo! (Nasdaq: YHOO)
(51%)....(56%)

Apple (Nasdaq: AAPL)
(40%)....(60%)

Bank of America (NYSE: BAC)
(48%)....(62%)

Adobe (Nasdaq: ADBE)
(39%)....(56%)

Starbucks (Nasdaq: SBUX)
(60%)....(52%)

Pfizer (NYSE: PFE)
(27%)....(37%)

Schlumberger (NYSE: SLB)
(52%)....(33%)

Look scary? It is. And it could easily happen.

But here's the silver lining: Every one of those stocks -- heck, the overwhelming majority of stocks -- are worth much more than a measly 8 times earnings. The only thing that pushes the average stock to such embarrassing levels is an overdose of panic, rather than a good reading on what the company might actually be worth.

Be brave As difficult as it is right now, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. Those brave enough to dive in when no one else dares to touch stocks are the ones who end up scoring the multibagger returns.


Need proof? Think about the best times you could have bought stocks in the past:

  • after the economy recovered from oil shocks in the '70s,
  • after the magnificent market crash of 1987, after global financial markets seized up in 1998, and
  • after the 9/11 attacks that shook markets to the core.

As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether.

And that's exactly where we are.

Pick what side you'd like to be on The next few years are likely to be quite a ride. On the other hand, the history of the market shows that gloomy, volatile periods also provide once-in-a-lifetime opportunities that can earn ridiculous returns as rationality gets back on track.

If you need a few ideas, our team at Motley Fool Inside Value is sifting through the market rubble to find those opportunities. To see what they're recommending right now, click here to try the service free for 30 days. There's no obligation to subscribe.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Pfizer and Bank of America are Motley Fool Income Investor recommendations. Starbucks and Pfizer are Inside Value picks. Starbucks and Apple are Stock Advisor picks. The Fool owns shares of Starbucks and Pfizer. The Motley Fool is investor writing for investors.
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