Reality Check: This Has Happened Before

The S&P 500 is down 11.2% from its October 9 peak, officially a bear market. This market sell-off is presenting great opportunities to make lots of money, in my opinion. In five years, my most likely regret will be that I conceded and got scared, and failed to capitalize on some unbelievable sales. The challenge is deciding how aggressive I can I afford to get ...I should definitely get more aggressive.

My portfolio is down, though it is not as bad as it looks by Vestopia's calculations (which contain errors). My returns since inception are -13.5% as of January 8; rolling three month returns are slightly better. There are times when I wonder, "why me?" when I look at my account balance.

An 11.2 percent decline of the S&P 500 belies the severity of the current bear market. I have seen stocks down 60-70%; stocks whose only sin was being in an economically cyclical industry. The thing about cycles is that what goes down usually (but not always) goes up again.

No news and irrelevant, or even positive news announcements are sending stocks down 5%-10%. Reasonably good companies are trading at 6 to 8 times trough earnings - that represents a 12-17% earnings yield, not including growth. Did I say that is on trough earnings?

Technical and momentum investors are having a field day because day after day of sell-offs looks like a trend. And, as some like to say, the trend is your friend ... until it's not. Let's have a reality check, this has happened before. In the summer of 2002, everything sold off. Sure, the tech bubble had burst the two years prior, but that had been a move back to reality. Us value investors got a respite from that (we don't generally participate in bubbles, so we don't get hurt as bad when the bubble bursts).

However, in 2002, there was no refuge. Cheap stocks were everywhere. A portfolio I was managing had dropped nearly 30% in the second and third quarter of that year. By the end of 2004, it had doubled from its low, and that was a reasonably diversified portfolio. I am seeing cheaper stocks now then I saw then.

In 1998 and 1999, in the midst of the wildest bubble in recent memory (the tech bubble), there was a bear market in everything else. The tech bubble sucked money out of non-tech related stocks. Value managers were going out of business by the handful. It was ugly. Many value types were forced to cheat - buying bubble stocks so they wouldn't get fired. We all know how that ended. The ones that didn't cheat largely bypassed the bust.

I don't know when this bear market will end or how low it will go. As I said, there are times when I wonder, "why me?" when I look at my account balance. Then there are other times when I am ready to sell all that I own to buy into this market. I probably won't do that, but I am looking at ways to increase my exposure and take advantage of these fire-sale prices.