Don't "Stay the Course": Look for Opportunties

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Includes: DIA, QQQ, SPY
by: Joe Ponzio

I'm not going to give you the standard "stay the course" or "now is the time to buy" garbage — there are plenty of other places to go for noise. Let's, instead, look at the news of what's happening.

The Market and The Looming Recession

To help delay or stop the looming recession, the Fed cut interest rates by 75 basis points. What does this mean for silent partners/business owners? Not a whole lot. Mr. Buffett on this year's stock market, economy, interest rates, and the upcoming election:

Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.

The hardest part about watching the markets crash is, well, watching the markets crash. We will see the markets up 20% or down 20% (or more) in future years; still, great businesses will grow and their stock prices will follow. The solution? Stop watching the markets!

I'll admit — it's easier said than done. And yet, for decades leading up to the 1990s, that is exactly how regular people had to invest. Quotes were only available the next day, in the newspaper. To invest in the stock market, you had to buy great companies at great prices and then let time do its thing.

On Monday, I work up to an e-mail sitting in my inbox that read:

Tomorrow (this past Tuesday) is going to be a blood bath for U.S. markets. Right now, U.S. futures are posting steepest decline since 2001. I'm predicting the DJIA to be down 500 tomorrow. People are already calling tomorrow "Black Tuesday." It's going to be bad.

Watching CNBC , you would have thought the world was coming to an end. And what did I think? In fact, what was my exact response to that e-mail? (Word for word):

I know. I have been excited all morning. Businesses are going on sale today!

The Lesson

Buffett tells us:

Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.

If, for even a second, you became "panic-stricken" on Tuesday and sold — or considered selling — your great, underpriced companies because of market movements, you probably shouldn't be in the markets. Unless there was a fundamental change in your business from Friday to Tuesday, there was no real change.

The Major Drops In Prices

I don't know what you experienced, but here is what I noticed: A lot of great, underpriced companies have not dropped nearly as much as the markets. In fact, a combination of workouts, patience, and long-term outlook have provided some very rewarding results over the past six months. (Not a good timeframe, but appropriate for this discussion).

In the past six months, I have only showcased three underpriced companies (Johnson & Johnson, Walmart and American Eagle) and one complete workout (Tribune). Hey, investing is boring.

Putting 10% of your portfolio into each position at those prices (Note: Do your own research, don't just buy what I say, and don't judge your portfolio on six-months results!), your portfolio would be up 4.1% since June 27, 2007 (the JNJ post and first position) versus down 10.6% for the DJIA (and likely more for those fee-heavy mutual funds).

If you can lose less in down markets, gain in sideways markets, and keep up (in whole or in part) in up markets, you'll end up with some very satisfactory results.

What Does This All Mean?

If nothing else, it should remind you that there are always a ton of overpriced companies that, from time to time, must be corrected by moderate to severe market drops. When the value of those companies cannot support the inflated prices, prices begin to drop. Considering that great, underpriced businesses are hard to find, it is no wonder that, regardless of the markets, you often get more protection in great, underpriced businesses than great, fairly priced businesses, speculation, or any other form of "investing".

(What are the markets but a collection of businesses? When the majority of businesses are overpriced, that pricing will correct and the markets — the collection — will fall, regardless of any individual company's price or value.)

What Should We Be Doing Now?

Look for opportunities — workouts, great businesses, etc. I'm not going to tell you to "stay the course" because, well, there is no "course" — just opportunities. If you panic when the markets are down, regardless of the health of your businesses, consider getting out now, buying individual bonds, and never looking back.

And for goodness sake, don't even think about selling now, just to jump back in when the markets have "rallied" to new highs. If you don't learn from history, you are doomed to repeat it — at the ultimate expense of your goals and dreams.

The Book

Enough market talk. What's up with the book? Thanks to my superstar agents at Jonathan Scott, I have signed on with Adams Media to publish F Wall Street. Until the actual release date is firm, I can't say when it will be out, but we are shooting for in or before mid-2009. Rest assured, you'll know when I know.



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