The Risk in Stocks Hasn't Been This Low in 34 Years
By Dan Ferris, editor, Extreme Value
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.
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NATURAL GAS IS NOW ACTING BULLISH
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.
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Gadfly investor Carl Icahn sees plenty of investment opportunities, despite the fact that the United States is suffering through its worst financial crisis in at least 70 years.
While he expresses caution about investing now, Icahn talks up the energy and pipeline sector.
"Energy has gotten so killed," he says. "Some of these energy stocks and pipeline companies are very cheap right now."
Senior bank debt also represents an attractive investment, Icahn says. "The (senior) debt that the banks loaned to the private-equity groups, for instance, is selling quite cheaply. It might go lower, but it's quite cheap."
He notes that the debt offers 15 percent to 16 percent returns with little risk.
Icahn also sees pharmaceutical companies benefiting from buying biotechnology firms.
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Crude oil fell more than $5 a barrel [on Wednesday] to a 16-month low and gasoline tumbled as weakening fuel consumption outweighed prospects of a production cut by OPEC at a meeting this week.
U.S. fuel demand during the past four weeks was down 8.5 percent from a year ago, an Energy Department report today showed. The financial crisis that's curbed the nation's energy use is spreading to emerging markets. OPEC will decide on Oct. 24 to lower output by at least 1 million barrels a day, according to a Bloomberg News survey.
"The market is more concerned about the economy than anything else," said Tom Bentz, senior energy analyst at BNP Paribas in New York. "Until there is a recovery of the financial system and the economic picture, oil will trend lower, even if OPEC makes a cut of 1 million barrels plus."
Crude oil for December delivery declined $5.07, or 7 percent, to $67.11 a barrel at 12:55 p.m. on the New York Mercantile Exchange. Futures touched $66.83, the lowest since June 14, 2007. Prices, which have tumbled 54 percent since reaching a record $147.27 on July 11, are down 23 percent from a year ago.
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