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Beware the Stock Value Mirage

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It's more proof of what I've been saying for the past 3 years: Volatility is the real "new normal" in the stock market. And the most predictable side of that volatility is the down side. You can either change with the times and get up to 2,000% richer OR get left behind and let the volatility destroy your portfolio. Imagine turning $100 into $5,466 in 31 days... $100 into $6,321 in 46 days... or into $13,600 in 99 days. And turning $2,000 into $82,888... or taking your $7,400 nest egg and exploding it into $226,467 - all in just FOUR MONTHS.


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September 17, 2011 - Beware the Stock Value Mirage - By Zacks Investment Research

By: Steve Reitmeister

Many investors are drooling over the perceived values they see in today's stock market. However, many of these people are falling into a dangerous trap that will lead to horrific losses in the days to come.

Below I will detail the mistakes these investors are making, so you can avoid the same fate. Plus I will give strategies to make money in the current turbulent market environment and the years ahead.

Looming Recession = 40% Drop in Stocks . . . Or More

Certainly I'm not the first guy to warn you that a recession is likely on our doorsteps. You don't have to look far to see the signs:

• US Debt out of control
• Consumer Sentiment is plunging
• Manufacturing sector is contracting
• No Jobs Growth...and signs of getting worse
• Oh, did I forget to mention the European Debt Crisis?

I could go on, but I think you get the point. And the sad fact is that the average recession brings about a 40% decline in stock prices. Unfortunately this has the markings of an even worse than average recession, and thus worse than average bear market.

Why Do Stocks Decline So Much?

It's really a simple 2-part equation:

Part 1: Earnings Drop 20%: Recessions mean that economic growth heads south. This lowering of demand is disastrous for corporate profits with an average 20% decline. Note that the recession of 2008/2009 saw profits decline by more like 50%.

So anyone measuring a stock's value based upon its most recent earnings, or current earnings estimates, is seeing a "value mirage" that disappears as the recession unfolds.

Part 2: P/E Drops About 20%: As the bear market keeps mauling stock prices, investor emotions quickly swing from greed to fear. And that fear greatly depresses their desire to take on risk. The result is that the P/E paid for stocks will go lower by about 20% as well.

Now add those two parts together and you can easily see how stocks can be cut by 40%. So the current 11% decline in the market from the recent peak is nothing but a scratch on the surface of where things are likely headed.

Are you getting depressed? That is certainly not my goal because...

Bear Markets Offer GREAT Profit Opportunities for Investors

The playbook for most investors has only three pages:

Page 1: Buy and hold stocks for the long haul.
Page 2: After stocks drop 40%, and I freak out, then go to cash.
Page 3: Pay huge fees to brokers and mutual fund managers no matter what happens.

Yes, most investors buy high and sell low, leading to horrific results. Yet it doesn't have to be that way. So time to burn the old playbook and start over with this one page manifesto:

• When the economy is going into a recession, then short stocks or buy short ETFs to profit from the ride lower.

• When the recession seems at its full zenith, and everyone is in a horrible panic, then BUY, BUY, BUY the best growth stocks at phenomenal discounts. Then take your profits when the next recession is in the air.

• Rinse and Repeat as needed. Retire young. Send Thank You note to Steve Reitmeister ;-)

First Steps

Would you like to know more about how to profit on the way down, and then pounce on discounted stocks at the right time? To get you started, I put together a video briefing.

It's free to watch but will soon be taken off the site, so please be sure to view it now.

In it, you'll learn why I see the opportunity of a lifetime for a particular investment strategy. The current market is similar to 2001 when I bought slumping Priceline [PCLN] and Amazon [AMZN] shares for my family's trust account at amazing discounts. Now I'm still riding out the 30 and 20-bagger gains on these shares, and I'll show you how to find today's equivalents of these winning stocks.

More importantly, you'll learn the secret of how to ride them out for mega-gains, even while others are jumping off for small profits.

Watch Steve Reitmeister Investment Strategy Presentation

Wishing you great financial success,

Steve

Steve Reitmeister has been with Zacks since 1999 and currently serves as the Executive Vice President in charge of Zacks and all of its leading products for individual investors. He is also the Editor the new service, the Reitmeister Value Investor.

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