Buy Companies With Strong Fundamentals and Wait Out The Storm

by: Envoy Global Research

I've recently received a few emails from subscribers asking about my outlook for a few of the stocks I have mentioned on this site. Instead of going through each stock individually, I have some general observations to make.

From my perspective, we are currently in a bear market, especially for the micro-cap, "junk" stocks, which I generally recommend for actively managed portfolios. It's amazing how quickly market sentiment can turn, but that's to be expected and it's precisely why I view the market as similar to casino. Despite the fact that little has changed in terms of business fundamentals for most of companies I follow, many of the stocks have become extremely volatile and drops of 50% plus are are becoming quite common.

There is clearly little justification for these equity movements when you consider the underlying businesses. The declines are I believe more of a reflection of illiquid markets and fewer market players, or outright gamblers for that matter. With technology stocks, the option scandal is also a consideration, but then again, I'm not bothered by that development since I've mentioned in the past that most stocks are merely a mechanism of wealth transfer from individual investors to management. So I'm a bit surprised that people are dismayed by the option "fraud". It's just part of the game and something you need to consider before investing in any stock (e.g. I rarely purchase a stock with significantly in-the-money executive stock option prices). Eventually, the option concerns will get priced in and blow over.

So what's an individual investor do? Well, I'm just waiting it out. As long as the business fundamentals of the companies I've mentioned here continue to improve, the stocks should bottom and then eventually recover. Of course, the timing for a new bull market is impossible to predict, but if the companies you have invested in have a strong balance sheet, the odds favor a new bull market at some point and you can wait out the bear with no fear of a permanent loss of capital. It pays to remember that sentiment can and does turn bullish on a dime, and it's therefore silly to sell into illiquid markets if the businesses are doing OK. It´s just a question of time.

Finally, there is probably one other thing to remember: In depth analysis is never all that important in the stock market. Aside from the fact that market is most often irrational, sophisticated analysis is clearly not needed in a bull market and in a bear market you don´t want to hear it. In other words, too much information is, I believe, dangerous to the health of your portfolio. If the companies you own have the financial strength to survive a few bad years and the cash flow potential to ignite investor interest in the next bull run, you should be OK. That's at least been my experience from past market sell-offs.

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