Financials: Market Favors Fear Rather Than Valuation

"Be fearful when others are greedy and greedy when others are fearful" is the oft-quoted advice of Warren Buffett.

Easier said than done. There was fear in WaMu (WM) yesterday. The stock was priced below book value and with an astronomical yield. If you would have bought other's fear, you would be down 17% on the day on your WaMu shares. A few months ago shares were priced in the low 40's. Right now they are at $20.50.

If you buy WaMu today will you triple your money in 3 years? Will your friends later agree--after the fact--that the bank's leading retail locations, discount to book, and high yield made the investment thesis oh so obvious? Or will you lose another 17% tomorrow?

Similar story with Capital One Financial (COF), down another 10% today, priced below book, 36% off its 52 week high. Price to book discounts are even more extreme by mortgage REITs. Some are trading for a third or less of book value.

It's not just financials that are being dumped. Category leaders like Home Depot (HD), Pfizer (PFE), Office Depot (ODP) are trading near 10x earnings. Run some screens. There's plenty of stuff priced at amazingly low multiples.

Valuation is temporarily being ignored by the market. Fear is ruling the day. If you buy everything cheap today, will you be a hero tomorrow? Or will you end up in poverty?

The value crowd likes to talk about buying stuff that's sold off. It's easy to talk about when volatility is benign. It's hard to do when stocks seem to have no bottom. It's catching falling knives, as they say. Cheap stocks get cheaper. And cheaper and cheaper.

Indeed, some of the fear is justified. Some of the discounts to book you see may end up worthless. But some will recover. This is a market where fortunes are not only lost, but made. Especially by those that understand what they own, can ignore volatility, and can hold through the storm.

Be fearful when others are greedy and greedy when others are fearful remains true. And others are being fearful. Just don't buy the fear wholesale. Pick your spots. Don't let volatility scare you out of shooting. But don't forget to aim either.