Friday, March 6, 2009

A great sale on equities

If you could buy today’s car at prices from 23 years ago, would you do it? Absolutely, you’d answer, if it was the same car with today’s options for a much cheaper price. Who wouldn’t want that discount?
That’s exactly the type of sale we’re experiencing in the stock market. The market’s downward slide doesn’t mean that some of the companies aren’t solid, or that they are bad investments. Terrific companies are getting hammered by the guilt-by-association prevalent in the market right now. It’s driving down prices to what they were almost a quarter of a century ago.
The pack mentality makes this a great time to buy solid companies with strong track records. You’d be hard-pressed to find another time in recent history that equals the steep discount we’re seeing in the market, particularly this week.
At the Family Investment Center, we recently had the opportunity to host B.D. Horton, a certified financial planner and certified public accountant who is Vice President of Territory Sales for American Century Investments, to speak to our friends and clients. Horton’s research shows that when a bear market ends, the rebound is steep and plentiful. Within one year of the end of a bear market, the stock market has been up, on average, 36 percent. In examining consumer confidence, he showed that at nearly every point when the level has dipped low, as it has now, it begins to rebound.
The average bear market runs about one-fifth in length of the average bull market. Further, the average bull market grows by over 100 percent, while the average bear loses a third of that. So, by the averages, it makes sense to wait out the bears to profit from the bulls.
I know this market continues to challenge all of us - our sanity, our philosophy, our fears, our concern for friends and ourselves. But I believe economic fundamental forces of good are gathering. If I had a chunk of money to put to work, I would do it in equities without hesitation.
A recent biography of Warren Buffet called “The Snowball” has captured the our attention right now. There are lots of pearls of wisdom there. Buffet maintains that the stock market is like a voting machine in the short-run, and a weighing machine in the long run. Clearly, Wall Street is highly skeptical of our new President Barack Obama, the Democrats, the stimulus and bailouts in general. The stock market is voting its skepticism, not necessarily on real facts about our economy.
The current forward price to earnings ratio of the S&P 500 is at 1986 levels. If you can weigh this dispassionately, it doesn't take long to see that you can buy 2009 companies at 23 year discounts. What a value play! Looking back in a few years, we will recognize this as the great buying opportunity of our generation.

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