Rad Posted October 6, 2008 Share Posted October 6, 2008 Most people do the opposite. Opportunity knocks... ................... • THE INTELLIGENT INVESTOR • OCTOBER 4, 2008 • By JASON ZWEIG Summon Your Courage and Buy Stocks Investors Who Conquer Stock-Phobia Have an Edge Over Those Too Focused on Their Rearview Mirror During the Great Depression, an entire generation became convinced that owning stocks was dangerous. But if you were among the courageous few who bought and held stocks during and after the Depression, you earned spectacular returns. Depression-level stock phobia might be making a comeback. Will you suffer from it or conquer it? This past Monday, a team of researchers conducted an online survey of nearly 600 people nationwide. The results constitute a unique real-time recording of what was running through people's minds from 1 p.m. to 5 p.m. Eastern time on the day the Dow was shedding nearly 778 points in a ragged panic. First and foremost, Americans are afraid. Asked whether "the financial challenges the country is facing now pose a greater threat to the quality of my life" than major natural disasters, 87% agreed; 83% were more worried about the financial crisis than a terrorist attack. Psychologist Paul Slovic of the University of Oregon, who led the study, had investors estimate the performance of their stocks and stock funds over the next 12 months and the decade to come. When Dr. Slovic last asked this question, in early 2001, only 6.7% of investors expected a zero or negative return during the coming year and a mere 1.3% thought they would have no gains over the next 10 years. This past Monday, however, 36% foresaw no profits in the next 12 months and fully 5% predicted that their portfolios would go absolutely nowhere for a decade. Investors seem riveted by what is happening, as if they were the witnesses to a fatal accident unspooling in slow motion before their eyes. The closeness with which Americans say they have tracked events "is really kind of astounding," says Dr. Slovic's collaborator at the University of Oregon, psychologist Ellen Peters. Asked how long they had watched the financial news on television each day in the past week, 74% said at least one hour and 15% said four hours or more. In short, investors' view of the decade to come is being shaped by the events of the last few days. Peering into the future, all they can see is the immediate past, which is full of anger, pain and distrust. As finance professor Meir Statman of Santa Clara University says, "Fear increases pessimism." Add it all up, and it is hard not to be bullish. As an intelligent investor, you must always ask: What is my edge? What information or skill do I possess that the people on the other side of the trade don't? In normal times, that is a high hurdle. Today, however, you need only two things in order to have an automatic edge: cash and courage. This past Thursday, Columbia Business School held a conference on value investing to commemorate the publication of the revised edition of Benjamin Graham's classic volume, "Security Analysis." Seth Klarman of Baupost Group in Boston is an editor of the book and one of the leading value investors in the country. "Normally, as a buyer you have to compete with a lot of very, very smart competitors," said Mr. Klarman. "But many of the smartest people are on the sidelines now because of redemptions, margin calls or panicked-out-of-their-mind selling. So you don't have to be as smart as you did before. You just have to be in the game." The day Mr. Klarman spoke, the Dow fell an additional 348 points, and 658 stocks, or more than 15% of the total, hit new 52-week lows on the New York Stock Exchange. Yet the word Mr. Klarman and several other speakers kept using was "excited." That is because investments everywhere are priced as if the whole solar system were going out of business. U.S. stocks have lost 24% since Jan. 1; foreign stocks are off 32%; emerging markets, nearly 40%; junk bonds are down 13%; even municipal bonds have fallen almost 10%. Money is pouring into U.S. Treasury debt -- so much so that stocks now offer more income than bonds do. The dividend yield on the Dow Jones Industrial Average is currently at 3.14%, higher than the 2.68% yield on the five-year Treasury note. With so many professional money managers afraid to act, with most of the public in the grip of fear and anger, you should put your cash and your courage to work. If you have no cash, use your courage: Rebalance by selling a little of anything that's gone up and buying more of whatever's gone down. If you have both cash and courage, make a list of 10 stocks you've always wanted to own at "the right price." Chances are, they are cheap. Better yet, think of an investment category you've long wanted to venture into, like emerging markets. Chances are, it is on sale. Just about everything is. ..................... What the Best Money Managers Are Doing Now By Tim Hanson September 23, 2008 The stock market is tanking, the government is intervening, financial and political uncertainty abounds, and respected money managers -- thanks to redemptions -- are suddenly seeing less and less money to manage. Things are looking a bit grim. But if you stand back and take stock of the letters these same money managers recently sent to shareholders, you get a very different perspective. For example ... Third Avenue's Marty Whitman revealed in his Aug. 11 letter that he recently purchased $1.5 million worth of Third Avenue Value (TAVFX) shares, and noted that he's "especially enthusiastic" about the fund's prospects. According to Whitman, the securities Third Avenue specializes in buying are "trading at ultra-attractive prices" -- such as the yet-to-be-unlocked value at Sears Holding (Nasdaq: SHLD). Bruce Berkowitz told his Fairholme (FAIRX) shareholders that "We continue to ignore the [panicking] crowd." Using sales, new inflows, and "cash held for stressful times," the fund is buying shares of dirt cheap health-care stocks such as UnitedHealth (NYSE: UNH), Forest Labs (NYSE: FRX), and Wellcare (NYSE: WCG). And then there was Bill Miller, who told his shareholders about a conversation he had with Warren Buffett recently, where they both agreed they were optimistic about the future. Moreover, Miller pointed out that the best time to buy his fund was after its performance had been dismal. By that logic, there has never been a better time to buy Legg Mason Value Trust (LMVTX). The best money managers are optimistic -- and they're buying. Now then ... Don't assume that these money managers are ignoring the current financial calamity. There's no escaping it. But there's also not much any of us can do about it, other than taking advantage of currently depressed stock prices to buy shares of companies that: 1. Will be in business 10 years from now. 2. Will be bigger 10 years from now. 3. Will generate significant amounts of cash in each of the next 10 years. Take a company like Nike (NYSE: NKE), for example. With $2.8 billion in cash and just $625 million in total debt, it's in no danger of becoming insolvent. And with consumers worldwide stressed by nearly unprecedented food and energy costs, the company is still solidly profitable. While this holiday season will likely be tough, holiday seasons 2009 through 2018 will likely be healthier. Yet at 17 times earnings, the stock looks cheap, and given the announcement that the company will be buying back $5 billion worth of stock, it seems that Nike management agrees. Microsoft (Nasdaq: MSFT) is another big brand name that’s in the bargain bin, and management there has committed to buying back $40 billion worth of stock over the next five years. The question to ask yourself is not how these companies will hold up in the fourth quarter of 2008 -- it's how they will hold up over the next decade. If they have a durable brand, cash on the balance sheet, and a verifiable track record as a quality operator, then I believe they will hold up quite well. That's the easy money If you're willing to dig in and get your hands dirty, however, you can find even better bargains among the unknown stocks that professional analysts and investors simply aren't paying attention to. As Andrew Ross Sorkin wrote in a recent New York Times column, "t is hard to find good research on small companies. All the focus has moved to large companies where the big money is sloshing around." Quote Link to comment Share on other sites More sharing options...
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