By
Dan Ferris, editor, Extreme Value
Thursday, October 23, 2008
You're going to think I'm crazy for writing this, but right now, there is less risk in stocks than at any time in 34 years.
If you won't take my word for that, take it from the greatest investor in history. On Friday, Warren Buffett said it's definitely time to buy. Buffett only buys when things are dirt-cheap... and he hasn't come out and made such an enthusiastic public statement since 1974.
Bullish as I am, I still think it's important for you to understand why so many investors have been selling stocks. The simple explanation is investors the world over, from the smallest individual account to the largest financial institution, have been liquidating their holdings all at once.
The big institutions are liquidating because they borrowed a lot of money and made investments whose value depended on home prices and credit. Home prices have fallen dramatically, and credit is hard to get now, so the value of their investments is down. That causes the people who lent them money to immediately demand more collateral or repayment.
Either way, those big investors who borrowed all that money must sell something to come up with the cash... and fast. Unfortunately, the housing-related investments they bought aren't popular right now and can't be sold quickly. So the large institutions are selling anything they can sell quickly. Stocks are liquid and sell quickly, so investors are calling up their brokers and telling them to sell everything right away.
That's why stocks have been falling so much. It's like a giant bankruptcy sale. Or perhaps, to be a little more accurate, it's a giant sale that represents a mass attempt to prevent bankruptcy.
Not only have overindebted investors been selling, many others are selling simply because... everyone else is selling. They're even selling gold by the truckload.
Most stock investors don't even try to understand the businesses they're investing in. They buy a ticker symbol based on rumors and hype and hope it goes up. They're not really investing. They're gambling. So when stock prices fall, they get scared and sell, too. That's what makes the market really crash the way it has over the last few weeks.
When you understand the businesses you're holding, what they're worth, and what kind of future they have, you can sleep soundly at night, no matter what the share prices do in the short term. Peter Lynch, the famous Fidelity fund manager, says the secret to getting rich in stocks is not getting scared out of them. The secret to not getting scared out of stocks is to do your homework and know what you're holding.
The only rational thing for an informed investor to do in this environment is to hang on to good businesses that are obviously worth more than what they're selling for. I put the great businesses of the world like ExxonMobil and Microsoft in this category right now. Both are absurdly cheap world-champion cash generators. It's only when everyone sells do these excellent businesses go for such low valuations.
Far from being a scary environment, this is the most exciting time of all to be an investor. Opportunities are being created right and left. Great stocks are once again selling at dirt-cheap valuations. And far from being risky, it's a safe time to buy right now.
Good investing,
Dan Ferris
Editor's note: Dan Ferris is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
Yesterday marked another "behind the woodshed" day for commodities.
Receiving a bullet to the head were blue-chip names like Freeport-McMoRan (copper), Suncor Energy (oil sands), Petrobras (oil), Goldcorp (gold), and Cameco (uranium). All hit new yearly lows on big volume. All are down more than 50% since June. It's no wonder... Oil, gold, and copper are in clear downtrends right now. Which makes the action in natural gas all the more interesting...
We've had a close on eye on "natty" for two reasons: 1) Our colleague Jeff Clark is bullish on the clean fuel. As we've mentioned many times, Jeff has an annoying habit of always being right... and 2) According to the latest trading data, a huge chunk of the hedge-fund world is bearish on natural gas. When everyone gets on one side of the boat, it always tips to the other side.
Now, here's where it gets interesting: Commodities tend to move together. If oil suffers a huge 7% decline in one day, there's a great chance that copper, gold, platinum, and natural gas will be down big as well. Yesterday, oil suffered that big decline... but natty barely moved. It's a bullish sign when a commodity refuses to fall when the whole "club" is hammered.
The End of the Paper-Money Experiment By Tom DysonWednesday, October 22, 2008
The flaw with paper money is, it's portable, durable, homogeneous, and divisible... but it's not valuable. It's only paper. So there's always a temptation to print money out of thin air. And that's what always happens. Paper-money systems always end up collapsing.
I Never Thought I'd Get Such a Great Opportunity... By Dr. Steve SjuggerudTuesday, October 21, 2008
I didn't think I'd see "really cheap" days like those again in my career. I lived through part of the greatest boom in the history of stocks. But we never got the classic bust. Until last week...
Once-in-a-Lifetime Buying Opportunity in Gold Stocks By Dr. Steve SjuggerudMonday, October 20, 2008
Typically, investors buy gold stocks for their leverage to the gold price. The basic idea is, if gold goes up 10%, then gold stocks should go up 20% or more. But in this case, Doody says, "When the buyers for all stocks go on vacation, they take the gold stock investors along."
Why Bond Prices Will Collapse By Tom DysonFriday, October 17, 2008
We're passing through the worst credit crunch in America's history. You'd think government bonds would have soared. But they didn't. The problem is, if Treasury bonds were the last investment on Earth, it wouldn't matter right now. The world needs cash. And it'll sell any asset to get it... even Treasuries.
