What should we look for on Monday? I believe we washed out this week with the huge volume and VIX record. Plenty of buyers stepping in at low low prices. Which means there is support at the fire sale. Not sure where I can get the best bang for my buck here. Financials? or something safer? What other opinions do we have?
I believe in Solar too. Even my neighbors have the solar driveway lights, pretty cool. The analyst who downgraded them still has a buy rating on solar and said they should be stronger next year.
China implemented margin buying and shorting of stocks to help prop up their stock market this week. Economy still rosy. Consumers on a spending spree. If their market turns around we could see vast improvements in our Chinese holdings.
Remember when everyone was quoting Baron Rothschild, saying, "Buy when blood is in the streets"? Well, this is it. We're in the Wall Street equivalent of Kill Bill meets Jurassic Park. It looks like it's all over but the spurting.
Warren Buffett knows how to play this game. He's buying, and he says that in five or 10 years, "we'll look back on this period and we'll see that you could have made some extraordinary buys."
But when the market drops 9% in a day, it's hard to react logically, like Buffett -- and not, say, curl up into a quivering, sniffling ball. Here are five ways to help you achieve your goal.
1. Be afraid -- be very afraid Instead of looking at how much you can make by buying a stock, examine all the ways that you can lose. Bruce Berkowitz, who manages the Fairholme Fund, swears by this strategy. He tries to think of every possible scenario that can kill a company -- and if he can't find any, then he'll buy.
Even ridiculously paranoid scenarios deserve consideration. A year ago, it was inconceivable that a handful of the nation's biggest banks would go out of business and that credit markets would essentially freeze. But just because it was inconceivable, that doesn't mean it couldn't happen -- and it did.
In this environment, where no one is lending, you should be especially paranoid about debt covenants and maturing debt. Even if a company is profitable, a large debt maturity that it can't roll over could drive it into bankruptcy. With economic conditions as they are, companies are making moves they wouldn't have considered if the market were better, like General Motors (NYSE: GM) drawing down its credit lines and issuing equity to pay off debt.
2. Avoid black boxes Be suspicious of companies you don't understand or whose financials are opaque. In fact, unless you understand the business model, don't buy it at all.
Sure, Buffett has invested in Goldman Sachs (NYSE: GS), and it will probably turn out like many other Buffett investments. But unless you fully understand Goldman's investment portfolio -- which seems almost impossible right now -- it's difficult to be confident that the business is rock-solid.
The same sort of reasoning applies to retail banks such as Citigroup (NYSE: C) and bond insurers such as Ambac (NYSE: ABK). If you can't assess the risk, you can't be confident in the investment -- especially when blood is flowing like water.
3. Invest only money that you don't need soon Assume that the near-term market will remain volatile -- even after it smoothes out. That approach will prevent you from investing money you need in the near term, and thus protect you from losses you can't sustain.
Think of it this way: Suppose that you do find one of Buffett's extraordinary buys and are brave enough to pick it up. Then you're set, right? Well, not entirely. You can still lose if you're forced to sell. Remember, Buffett isn't saying these stocks will become 10-baggers tomorrow, or even next year. He's talking about five or 10 years.
So when you buy, don't buy with money you'll need soon, and definitely don't use margin. If you're forced to sell at a bad time because of a margin call, then you could lose money even if you've successfully identified a stock that goes on to become a 10-bagger.
For instance, immediately after the 9/11 tragedy, you could have bought Boyd (NYSE: BYD) at a cheap $5 per share. But a few days later, it traded at $3.50. If a margin call forced you to sell at that price, then you would have missed the stock rising above $50 over the subsequent five years. Ouch.
4. Ease in And all of that means you should be suspicious of how your chosen investments will perform initially. When the market's this volatile, don't put all of your money into a stock all at once. Instead, put a portion in when you see an attractive opportunity, but save some cash to buy more if it falls.
Some people buy in thirds on the way down so that they have two chances to average down without becoming overexposed to the stock. I recommend buying enough that you'll be happy when your stock goes up, but little enough that you'll also be happy if it falls significantly and you can buy more. I originally purchased Legg Mason (NYSE: LM) in the mid-$60s. The descent hasn't been fun, but it's easier to handle knowing that I can buy shares at an even lower price now. And I have.
5. Buy at a discount Of course, the whole reason you're trying to buy when there is blood on the streets is that that's when stocks are trading at big discounts to their fair value. Those discounts can propel your portfolio to extraordinary returns -- the bigger the discount, the bigger the potential return. Plus, a good understanding of a stock's intrinsic value can give you the confidence to hold in today's volatile market.
But make sure you're buying shares that are actually cheap. Many companies are trading at prices far lower than they were a year ago -- but that doesn't mean they're cheap. Fannie Mae (NYSE: FNM) had fallen a lot by mid-August, but it was still expensive.
The Foolish bottom line There's blood in the streets, so if you can handle the volatility, it really is a great time to invest -- but invest suspiciously and fearfully. It will do your portfolio good if you do
13 comments:
Hi Saleem,
What should we look for on Monday? I believe we washed out this week with the huge volume and VIX record. Plenty of buyers stepping in at low low prices. Which means there is support at the fire sale. Not sure where I can get the best bang for my buck here. Financials? or something safer? What other opinions do we have?
Hi Standards,
Yes....we have seen the low....all we need is a confirmation of this turnaround by closing GREEN on Monday.
The best to analyze stocks now is to figur out which sectors will fly 1st & 2nd......
I say Home Builders first Financials second & techs third in the magnitude of UP move...
WHY.....because they took it on the CHIN first second & last...
Saleem
Hi Saleem,
I was thinking of ETF's so I would not be at risk from a downgrade on a single stock. XLF? or QLD? What's the one for the NASDAQ?
Thanks
Standards
Hi Standards,
QLD is 2x Nasdaq...QQQQ is 1x Nasdaq.
UYG 2x Financials,XLF 1x Financials.
XHB is ETF for home builders....
Saleem
Saleem, what about solar stocks are they still pegged to oil, and what happens if oil falls more?
Hi Troy,
My guess oil is not going below $75.....
Solar will flourish as it is being promoted worldwide with subsidy.
I personally believe that pure play of silicon Wafer makers are best positioned as they get their money FIRST....think SOL & LDK.
Saleem
Hi Troy,
I believe in Solar too. Even my neighbors have the solar driveway lights, pretty cool. The analyst who downgraded them still has a buy rating on solar and said they should be stronger next year.
Thanks for the info Saleem.
Standards
Hi All,
China implemented margin buying and shorting of stocks to help prop up their stock market this week. Economy still rosy. Consumers on a spending spree. If their market turns around we could see vast improvements in our Chinese holdings.
Have a great weekend.
10 Reasons to be bullish:
http://bigpicture.typepad.com/comments/2008/10/10-bullish-sign.html#more
Hi Troy,
Thanks for the link to 10 reasons...looks very encouraging.
While I was there I listened to George Soros interview....quite scary as to how he is presenting his interpretation of current mess...
Saleem
SALEEM some reasons to invest:
Remember when everyone was quoting Baron Rothschild, saying, "Buy when blood is in the streets"? Well, this is it. We're in the Wall Street equivalent of Kill Bill meets Jurassic Park. It looks like it's all over but the spurting.
Warren Buffett knows how to play this game. He's buying, and he says that in five or 10 years, "we'll look back on this period and we'll see that you could have made some extraordinary buys."
But when the market drops 9% in a day, it's hard to react logically, like Buffett -- and not, say, curl up into a quivering, sniffling ball. Here are five ways to help you achieve your goal.
1. Be afraid -- be very afraid
Instead of looking at how much you can make by buying a stock, examine all the ways that you can lose. Bruce Berkowitz, who manages the Fairholme Fund, swears by this strategy. He tries to think of every possible scenario that can kill a company -- and if he can't find any, then he'll buy.
Even ridiculously paranoid scenarios deserve consideration. A year ago, it was inconceivable that a handful of the nation's biggest banks would go out of business and that credit markets would essentially freeze. But just because it was inconceivable, that doesn't mean it couldn't happen -- and it did.
In this environment, where no one is lending, you should be especially paranoid about debt covenants and maturing debt. Even if a company is profitable, a large debt maturity that it can't roll over could drive it into bankruptcy. With economic conditions as they are, companies are making moves they wouldn't have considered if the market were better, like General Motors (NYSE: GM) drawing down its credit lines and issuing equity to pay off debt.
2. Avoid black boxes
Be suspicious of companies you don't understand or whose financials are opaque. In fact, unless you understand the business model, don't buy it at all.
Sure, Buffett has invested in Goldman Sachs (NYSE: GS), and it will probably turn out like many other Buffett investments. But unless you fully understand Goldman's investment portfolio -- which seems almost impossible right now -- it's difficult to be confident that the business is rock-solid.
The same sort of reasoning applies to retail banks such as Citigroup (NYSE: C) and bond insurers such as Ambac (NYSE: ABK). If you can't assess the risk, you can't be confident in the investment -- especially when blood is flowing like water.
3. Invest only money that you don't need soon
Assume that the near-term market will remain volatile -- even after it smoothes out. That approach will prevent you from investing money you need in the near term, and thus protect you from losses you can't sustain.
Think of it this way: Suppose that you do find one of Buffett's extraordinary buys and are brave enough to pick it up. Then you're set, right? Well, not entirely. You can still lose if you're forced to sell. Remember, Buffett isn't saying these stocks will become 10-baggers tomorrow, or even next year. He's talking about five or 10 years.
So when you buy, don't buy with money you'll need soon, and definitely don't use margin. If you're forced to sell at a bad time because of a margin call, then you could lose money even if you've successfully identified a stock that goes on to become a 10-bagger.
For instance, immediately after the 9/11 tragedy, you could have bought Boyd (NYSE: BYD) at a cheap $5 per share. But a few days later, it traded at $3.50. If a margin call forced you to sell at that price, then you would have missed the stock rising above $50 over the subsequent five years. Ouch.
4. Ease in
And all of that means you should be suspicious of how your chosen investments will perform initially. When the market's this volatile, don't put all of your money into a stock all at once. Instead, put a portion in when you see an attractive opportunity, but save some cash to buy more if it falls.
Some people buy in thirds on the way down so that they have two chances to average down without becoming overexposed to the stock. I recommend buying enough that you'll be happy when your stock goes up, but little enough that you'll also be happy if it falls significantly and you can buy more. I originally purchased Legg Mason (NYSE: LM) in the mid-$60s. The descent hasn't been fun, but it's easier to handle knowing that I can buy shares at an even lower price now. And I have.
5. Buy at a discount
Of course, the whole reason you're trying to buy when there is blood on the streets is that that's when stocks are trading at big discounts to their fair value. Those discounts can propel your portfolio to extraordinary returns -- the bigger the discount, the bigger the potential return. Plus, a good understanding of a stock's intrinsic value can give you the confidence to hold in today's volatile market.
But make sure you're buying shares that are actually cheap. Many companies are trading at prices far lower than they were a year ago -- but that doesn't mean they're cheap. Fannie Mae (NYSE: FNM) had fallen a lot by mid-August, but it was still expensive.
The Foolish bottom line
There's blood in the streets, so if you can handle the volatility, it really is a great time to invest -- but invest suspiciously and fearfully. It will do your portfolio good if you do
SALEEM IBD 100 listing: % Off
Rank Company Symbol Price High
---- ---- ---- ---- ----
1 AMERICAN PUBLIC EDUC INC APEI 42.97 -19.3
2 QUALITY SYSTEMS INC QSII 38.29 -20.1
3 BUCKLE INC BKE 46.5 -30.5
4 WEBSENSE INC WBSN 19.76 -19.7
5 ALMOST FAMILY INC AFAM 35.08 -24.5
6 BUFFALO WILD WINGS INC BWLD 33.92 -24.6
7 CASH AMERICA INTL INC CSH 35.23 -27.9
8 SYNIVERSE HOLDINGS INC SVR 16.02 -30.1
9 WABTEC WAB 46.46 -23.5
10 HEALTHSPRING INC HS 17.05 -25.6
11 GMARKET INC ADS GMKT 20.05 -31.3
12 LIFE PARTNERS HOLDINGS LPHI 28.97 -26.3
13 HOME BANCSHARES INC HOMB 25.29 -27.7
14 AMEDISYS INC AMED 44.78 -34.1
15 SCHWAB CHARLES CORP SCHW 20.2 -29.7
16 STANLEY INC SXE 30.72 -21.2
17 AEROVIRONMENT INC AVAV 30.24 -15.1
18 NETLOGIC MICROSYSTEMS NETL 27.01 -32.9
19 GLOBAL PAYMENTS INC GPN 41.12 -17.6
20 SPARTAN STORES INC SPTN 23.54 -15.1
21 SOUTHSIDE BANCSHARES INC SBSI 22.27 -17.5
22 GREEN MTN COFFEE ROASTRS GMCR 32.75 -26.8
23 PERRIGO CO PRGO 31.33 -27.3
24 F T I CONSULTING INC FCN 66.37 -17
25 LACLEDE GROUP INC LG 39.33 -24.6
26 JOS A BANK CLOTHIERS INC JOSB 27.66 -33.7
27 FLOWERS FOODS INC FLO 27.59 -15.6
28 CHATTEM INC CHTT 63.05 -23.3
29 MCDONALDS CORP MCD 53.35 -20.4
30 NEOGEN CORP NEOG 24.8 -22.4
31 GENOPTIX INC GXDX 32 -19.6
32 DOLLAR TREE INC DLTR 32.73 -23.4
33 CHILDRENS PLACE RETAIL PLCE 31.87 -26.6
34 ROCK TENN CO CL A RKT 33.54 -27.7
35 P S S WORLD MEDICAL INC PSSI 17.11 -21.2
36 WOLVERINE WORLD WIDE INC WWW 25.74 -17.5
37 PINNACLE FINANCIAL PRTNR PNFP 24.96 -31.8
38 THORATEC CORP THOR 24.21 -18.5
39 DEVRY INC DV 44.49 -27.7
40 FRANKLIN ELECTRIC CO FELE 39.98 -26.7
41 CHURCH & DWIGHT INC CHD 54.46 -16.9
42 MARVEL ENTERTAINMENT INC MVL 29 -24.7
43 DIAMOND FOODS INC DMND 28 -9.4
44 CELLCOM ISRAEL LTD CEL 26.52 -28.4
45 EXPONENT INC EXPO 27.16 -30
46 HAWAIIAN ELECTRIC INDS HE 23.97 -19.4
47 CENTENE CORP CNC 19.49 -31.6
48 BOSTON BEER COMPANY SAM 43.31 -21.7
49 HAEMONETICS CORP HAE 55.77 -17.4
50 FAMILY DOLLAR STORES FDO 22.75 -30
51 ARROW FINANCIAL CORP AROW 26 -20.5
52 L H C GROUP INC LHCG 25.88 -17.6
53 HANGER ORTHOPEDIC GROUP HGR 15.16 -27.8
54 BARD C R INC BCR 82 -19.3
55 HEARTLAND PAYMENT SYS HPY 22.03 -33.2
56 B J S WHOLESALE CLUB INC BJ 34.7 -21.7
57 POTLATCH CORP PCH 44.7 -18.4
58 ORIENTAL FINANCIAL GP OFG 17.61 -27.7
59 STIFEL FINANCIAL CORP SF 40.45 -33.3
60 TOWNEBANK TOWN 20.1 -28
61 TRACTOR SUPPLY CO TSCO 38.19 -22.2
62 I P C THE HOSPITALIST CO IPCM 22.04 -22.8
63 PARTNER COMMUNICATNS ADS PTNR 18.37 -25.6
64 APPLIED INDUSTRIAL TECH AIT 24.41 -31.6
65 NIKE INC CL B NKE 54.53 -22.8
66 WAL-MART STORES WMT 50.95 -20.2
67 CAMPBELL SOUP CO CPB 34.23 -16.2
68 NAVIGANT CONSULTING INC NCI 16.65 -26.9
69 BIO RAD LABS INC BIO 87.9 -23.7
70 GREENHILL & CO INC GHL 67.58 -27.3
71 N B T BANCORP NBTB 25.08 -31.2
72 APPLIED SIGNAL TECH APSG 15.83 -16.1
73 ECOLAB INC ECL 39.53 -25.1
74 AMSURG CORP AMSG 23.14 -22.2
75 MATTHEWS INTL CORP MATW 44.31 -24.3
76 COMTECH TELECOMM CORP CMTL 43.98 -24.2
77 DUFF & PHELPS CORP CL A DUF 16.27 -28.5
78 SUFFOLK BANCORP NY SUBK 34.24 -30.2
79 HANCOCK HLDG CO HBHC 48.16 -29.6
80 RALCORP HOLDINGS INC RAH 61.37 -17.2
81 APTARGROUP INC ATR 33.53 -27.4
82 ABBOTT LABORATORIES ABT 49.45 -19.1
83 U I L HOLDING CO UIL 31 -18
84 PEET'S COFFEE AND TEA PEET 22.54 -25.8
85 WASTE CONNECTIONS INC WCN 30.62 -24.8
86 NORTHWEST BANCORP INC NWSB 25.7 -25.2
87 CITY HOLDING CO CHCO 39.71 -26.8
88 COMMERCE BANCSHARES CBSH 42.18 -24
89 FIRST FINL BANKSHARES FFIN 47.06 -29.8
90 C V S CAREMARK CORP CVS 30.88 -30.3
91 NICOR INC GAS 38.73 -25.5
92 NASH FINCH CO NAFC 37.86 -20.5
93 TOMPKINS FINANCIAL CORP TMP 40.5 -31.7
94 DIME COMMUNITY BANCSHRS DCOM 15.55 -34
95 S V B FINANCIAL GROUP SIVB 49.55 -32.7
96 LANDAUER INC LDR 59.9 -18.5
97 HEARTLAND FINANCIAL USA HTLF 22.36 -17.6
98 PROSPERITY BANCSHARES PRSP 33.74 -27.4
99 FIRST FINANCIAL CORP IND THFF 43.32 -13.4
100 PHASE FORWARD INC PFWD 17.29 -31.7
Hi Madmax,
Thanks for posting a very good article & IBD 100......
Saleem
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