Why Bad News Is An Investor’s Best Friend?
I was watching that ^DTV^ commercial the other day with the little girl from the 1982 movie Poltergeist, and was reminded of a part in the movie when she was trapped inside the nether world of ghosts that were terrorizing her family’s home, and would cry out: “mommy…” in a haunting and echoing tone. It was pretty scary actually.
Not unlike the turmoil in the markets in the last year, especially in the last month or so, that has driven a lot of traders and regular folks watching their life savings severely decline in value, call out at night for their mommies…
I guess in retrospect, I picked the perfect time to start a stock website devoted to the most volatile and unpredictable stocks available on Earth right? I mean, when things go bad, small-cap and micro-cap stocks go down far more than other performers, but the same holds true on the up side. This begs the question: What should one do with their money now?
I’ll tell you what you should do with your money! Grab every cent you can find, sell every piece of junk you have in your house, and find any cash that you’ve been saving for a rainy day, and put it to work in the market RIGHT NOW!
Stepping Back
Ok, let’s get a grip on the situation, and think about what can and should be done.
Most of us, me included, have gotten our butts handed to us over the last year, and more so over the last few weeks as things really went south in the market overall, and with smaller stocks in particular, as it only takes a few sellers with relatively large stakes liquidating their positions to hammer these stocks disproportionately more than their larger brethren.
But out of this rubble and what seems to be a debacle, comes amazing opportunity, if you know where to look. Smart investors, the ones that aren’t forced to sell their positions to meet margin requirements, redemptions or panic thresholds, realize that although they may not know when things will turn around, they know they certainly will.
You may have heard that on Friday, October 17, 2008, one of the world’s most respected investors, Warren Buffett himself, wrote and op-ed piece in the New York Times stating as much. In it Warren wrote:
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”
I couldn’t have said it any better myself. I mean seriously, do we think that great companies with sound balance sheets, great businesses, and dedicated and fully invested management teams are never going to succeed again?
I know, and have been preaching since I opened shop here on PeakStocks.com, that the best place for new money has been, and always will be, small and micro cap stocks that are in the early stages of this growth cycle, and are preparing, even now, to explode out of their doldrums as soon as there is any hint of an economic turnaround.
Is it a little disconcerting to watch your 401(k), mutual funds, or other holdings significantly decline in value in such rapid succession? Sure, of course it is, no one likes to wake up in the morning and see that they have lost 50% of their holding’s value. But you must put these types of moves, regardless of the reasons why they are happening, in perspective.
Ok, so some of the world’s premier banking stocks are having severe liquidity issues and are going out of business. Does this mean that a company that makes a product that is needed in good times and bad, is also going to go out of business?
What about a company like ^GEOY^, my current top recommendation. They sell satellite imagery to the National Geospatial-Intelligence Agency (NGA), as well as the online mapping industry, and other countries around the world for security and monitoring purposes.
Are you telling me that just because ^FNM^ and ^FRE^ no longer exist in their previous form, that countries around the world, and especially the U.S. will no longer require the type of satellite imagery necessary to keep their borders safe and monitor climate changes and potential threats to their countries?
You and I know that’s bogus. But that’s the reality of a stock market “crash”, and yes, I believe what we have seen was and is a crash, regardless of the media’s tip-toeing around the subject and reluctance to use the word.
Looked at another way, does anyone out there believe that just because companies like ^LEH^ and ^WM^ couldn’t keep their hands out of the cookie jar that people will stop buying Christmas gifts for their kids, or not take a vacation ever again, or that business travelers, (are there any businesses left in the U.S.?), will never have to travel again?
How about a company like ^AIR^, another PeakStocks.com recommendation, that serves the aerospace and defense industry via their Maintenance, Repair and Overhaul (MRO) division that maintains and repairs aircraft for major airlines? Will they all-of-a-sudden stop having aircraft to repair just because travel has slowed down?
Oh, and just in case you were wondering, AAR Corp. is trading BELOW its TANGIBLE book value of about $15.00 per share, AND insiders have been buying back the stock in droves recently, including the CEO. Are they smarter than the rest of the market? Probably not, but they are certainly more patient!
Yea, companies like ^AMR^, and ^LUV^ are cutting back their flights, retiring older aircraft that use more fuel, and reconsidering every nuance of their business to survive the economic downturn, but does anyone really feel these high quality stalwarts of their industry won’t survive this? Heck, they probably needed the incentive of higher fuel prices and decreased consumer demand in order to be forced to clean up their business models, look at their cost structures, and start actually charging fair value for the services that they offer.
What about restaurant companies like ^CMG^>, or ^EAT^, the owner of Chili’s and Macaroni Grill restaurants? Are they going to go out of business? You and I both know that’s not going to happen. Are they going to suffer in this decline and recession? Sure, of course, but will they stand the test of time? Absolutely.
A Little History
We’ve seen declines like this in the stock market for one reason or another since the time someone decided that trading shares of a company on public markets was a prudent thing to do. Even Buffett himself extols this point in his piece:
“A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.”
So is this time “different”? I highly doubt it. The panic might be different, and for different reasons, but the underlying fundamentals of the economy and its ability to continue on, and the market’s ability to discount future events, will always be there.
The same platitudes that Buffett described above are the same ones that other legendary investors such as Peter Lynch, have been telling us for years. In fact, Lynch in his amazingly powerful “One Up On Wall Street”, talks about how WE have a greater advantage over the big-wigs on Wall Street because of our ability to be nimble in times of stress and put our money to work in the smallest and most under followed companies because Wall Street won’t touch them.
Right now we are getting a huge discount on great companies. The market is a forward-looking barometer. When that future arrives, it is already much too late for you to make significant sums of money via your investments within its irrational walls. The time to invest is when EVERYONE ELSE is being irrational, but you are staying calm, collected and level-headed.
So What Do We Do?
If you’re done crying about your losses and wanting to be held by your mommy, it’s time to pick yourself off the floor, dust yourself off, look around, and realize that you’ve been given one of the best buying opportunities of the last decade. Should you be investing in stocks if you need that money to live on within the next 3-5 years? Probably not. Should you expect a significant return on that money in the next few weeks? Who knows.
What I can tell you is that if you are patient, seek out great companies that will stand the test of time, and then patiently add to your position throughout the weakness that has been presented to you, you will do fine, and soundly BEAT the market in the coming years.
No scratch that. You will CRUSH the market! That’s exactly what I intend to do, and will be doing in the coming weeks and months.
One more quote from the Buffett article:
“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
Bottom Line
Pretend for a moment that you awoke from a deep slumber for the last year or so and saw that the market had declined to levels not seen since 2002, when the last bull market began. Having not known what transpired to crack the market to such levels, you dutifully went to work looking for places to put your money and discovered that there were so many great companies out there trading at such decrepit valuations that you were almost giddy with joy.
There would be no panic in your actions, no fear in your thoughts, just the girlish laughter that comes from knowing that you were about to make some real wealth with long term plays on great companies, with great management teams, sound balance sheets and serious competitive advantages.
Did you know something that others don’t? Nope. You just stuck your neck out there and realized that someone was really going to be sorry they didn’t take the time to understand what was really going on, and realize that they have just been presented a gift.
If you have cash on the sidelines, start putting it to work. If you contribute to a 401(k) plan, or other savings/investment type account, max it out every single month. If you’ve got some old junk in the house that you could sell on ^EBAY^ or ^AMZN^, roll up your sleeves and get to work.
Get cash, find cash, create cash, then deploy that cash into the stock market RIGHT NOW! Understand the risks, be patient, and have a long term perspective, but start putting that cash to work immediately. In 5 years, you’ll look back and smile that you had the sound principles and disciplined approach necessary to put your hard earned money to work, when others were running around like chickens with their heads cut off saying: “I want my mommy!”
Chris Fernandez is the founder of PeakStocks.com, a recommendation blog, where he focuses on Micro-Cap and Small-Cap stocks since those are the types of stocks that he believes will earn you the highest return on investment over the long haul. To read a more detailed explanation of his investing style, please visit: PeakStocks.com