This Is the Opportunity You've Been Waiting For

You know those old investing platitudes? Be greedy when others are fearful. Buy when there's blood in the streets. You make most of your money in a bear market -- you just don't know it at the time.

They're all true. And they've never been more applicable than right now.

I don't see any blood ...
Unless your housing development was erected on an ancient Native American burial ground, this is the closest you're going to get to seeing actual blood running down the streets. People are scared. Investors are panicked. Hedge funds and mutual funds are liquidating major positions. And in the process, shares of great companies are trading for absurdly cheap valuations.

But isn't the world coming to an end?
No.

Our economy is likely headed for some rough times, but there's little doubt that America will survive -- and ultimately thrive. In the words of Warren Buffett: "This country is going to be living better 10 years from now than it is now. It will be living better in 20 years from now than 10 years from now. ... We've got all the ingredients for a sensational future."

Buffett's been busy lately putting his money where his mouth is. He has made high-profile investments in General Electric and Goldman Sachs' preferred stock, and he's likely licking his chops right now at the prospect of deploying capital in this target-rich environment.

So if Buffett's buying, why aren't fund managers following suit?

Volatile present, sensational future
Many fund managers likely agree with Buffett's sentiments. And at today's prices, they wish they could be like Buffett and buy stocks. However, due to a panicked investing populace, that's simply not possible.

You see, when individual investors elect to withdraw their money from a mutual fund, the fund manager must quickly come up with the cash to redeem those investors. For the week ended Oct. 8, equity investors withdrew a whopping $43 billion from mutual funds, spurring a wave of selling by fund managers -- even though those managers likely still believed in the prospects of the stocks they were selling!

As Morningstar's Director of Equity Research Pat Dorsey explained in a recent video, these stock sales had "nothing to do with fundamentals, nothing to do with the underpinnings of our economy ... no matter what the stocks are, no matter how attractive those assets may be, [fund managers] have to sell them because they need to raise the cash to send those checks out" to their investors.

And that $43 billion figure doesn't even include hedge fund managers who are forced to sell stocks due to investor redemptions and margin calls!

As master money manager Ken Heebner -- skipper of the CGM Focus fund -- told USA Today, "The reason for the sharp decline is massive selling from hedge funds, not because they want to, but because they have to reduce their leverage ... it's the biggest margin call since 1929."

Bad for funds, good for you
This indiscriminate selling likely explains why shares of quality companies have stumbled over the past month, even though the prospects of many of these companies have remained strong.

In his commentary to Ben Graham's The Intelligent Investor, Jason Zweig wrote:

Anything over 60% [institutional ownership] suggests that a stock is scarcely undiscovered and probably "overowned." When big institutions sell, they tend to move in lockstep, with disastrous results for the stock. Imagine all the Radio City Rockettes toppling off the front edge of the stage at once and you get the idea.

To see what he's talking about, take a look at the following table of great "overowned" companies:

Company

Institutional Ownership % (as of Last Quarter)

Stock Performance Over the Past Month

Apple (Nasdaq: AAPL  )

68%

(41.5%)

Johnson & Johnson (NYSE: JNJ  )

65.6%

(19.3%)

McDonald's (NYSE: MCD  )

79.8%

(17.6%)

Merck (NYSE: MRK  )

80.4%

(23.7%)

Microsoft (Nasdaq: MSFT  )

66.4%

(14.6%)

PepsiCo (NYSE: PEP  )

74.3%

(16.2%)

Procter & Gamble (NYSE: PG  )

60.6%

(15.3%)

Data from Capital IQ, a division of Standard & Poor's.

Now, I'll admit that these stocks are not dropping solely because of redemptions -- there are some tangible reasons for these losses (downgrades, concerns about consumer spending in a tough economy, etc.). But really, these are seven solid companies that will still be making money decades from now -- yet their shares have all slumped horribly over the past month. The fundamental quality of these businesses has not deteriorated over the course of four weeks -- just the companies' share prices.

Buy now, thank me later
Mutual fund and hedge fund managers can't buy shares in these companies right now -- but you can. If you have money sitting around that you're comfortable committing for the next three to five years, and if you can stomach a little short-term volatility, now is a great time to scoop up shares of quality companies on the cheap.

If you're looking for additional superior stock ideas that are worth buying today, you can see what Fool co-founders David and Tom Gardner are recommending to members of their Motley Fool Stock Advisor service free for 30 days. Click here for more information.

Rich Greifner believes he will also be living much better in 10 years' time. Rich does not own shares of any company mentioned in this article. Apple is a Stock Advisor recommendation. Microsoft is an Inside Value selection. Johnson & Johnson is an Income Investor pick. CGM Focus is a Champion Funds selection. The Motley Fool has a disclosure policy.


Read/Post Comments (25) | Recommend This Article (98)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 10, 2008, at 8:50 PM, USAeconomist wrote:

    In the near future, there is going to be a time where we all are standing here at the bottom, looking up, looking at where we have been and be in relief it is all over. Sites like these will no longer be impacting economic news http://www.buymyhousebeforethebanktakesit.com . The dust will settle and there will be great deals to be made, great opportunities to invest in and we will all move on. It will be a time for rebuilding, working together hand in hand, and lending a helping hand. Our actions will have become a part of history. You will be able to tell your grandkids you made it through the crash of 2008 and tell them your part. Your character will be determined, did you believe on not, did you hold on or not, did you panic or not, did you ride the course or not, did you contribute or take. What was your role, what did you do to help others, what did you do to help America in it’s time of need? Your decisions and actions today are what are building tomorrow. Make sure they are the right decisions.

  • Report this Comment On October 11, 2008, at 8:33 AM, paris13r wrote:

    market do not come down in a day or twos and go up

    u have to wait for 6 months or so for it to stabalise to go in

    unless ur the CIA wanting to have people trading in your stocks all time

    so they need not run away else where

    say in gold?

    u are giving poor advises here

    sorry

    tx

  • Report this Comment On October 11, 2008, at 9:42 AM, Llandryn wrote:

    Hi, I'm fortunate enough to have my "next-3-years nest egg" in cash right now, but all of my retirement savings are in stocks, and both my 401k and my IRA have tanked. (I'm 56 years old.) I have very limited investment options in my 401k and it's all in index funds. My IRA has a chunk of money in a small-cap index fund, another chunk in an international index fund, and the rest in Foolish stocks. I have no extra cash (or bonds) sitting around to invest in today's "bargains" or "safe holds". How should I balance my 401k between index funds right now? Large cap? mid-size? small? international? What about the IRA? Should I sell some of the index funds to buy individual stocks? At the moment I'm just hanging on to everything as it is.

    Thanks,

    mary

  • Report this Comment On October 12, 2008, at 9:27 AM, catnapper06 wrote:

    I was a long-time Fool reader and subscriber until the term "subprime" made its first appearance in our vocabulary. Having been beaten senseless with the bursting of the internet bubble (owning no internet stocks) and oodles of spare time (semi-retired) I began doing hours of daily research on-line in hopes of discovering if we were facing a garden-variety recession or something more profound. Once I determined, in my mind, that it was the latter, I bid adieu to MF, adding that perhaps they could use one contrarian opinion/service to their staunchly pro-market retinue. I now live by the words of Minyanville.com, the founder of which, Todd Harrison, had been calling for this financial meltdown since roughly 2003. Clearly, they have been correct so far (I got cautious months ago and am nearly even, yoy, in part due to a short position - not a recommendation) and though they are optimistic in the long term, they continue to warn that this will not be a normal unwind with a sharp recovery.

    I can honestly say I truly like and admire the entirety of Motley Fool's crew. Eventually, their optimism will certainly be correct, though I must conclude it has been blind, conventional wisdom thus far. Are we close the bottom, or is there more to go? No one knows, least of all me.

    I'm not smarter than anyone else here! But I do question authority, even when I hold them in the highest regard.

  • Report this Comment On October 12, 2008, at 10:44 AM, goatsnuff wrote:

    OK, Time to think about some buying. What do you think.

    1- Pepsi or Coke

    2- J&J or P&G

    3- Exxon or Chevron

    4- Intel or Microsoft

    5- IBM or AAPL

    6- MRK or PFE

  • Report this Comment On October 12, 2008, at 10:54 PM, Huskybytes wrote:

    Ditto llandryn

    I too am 54...my choices for 401k were rolled into an IRA when the dot.com crashed and with it my career in IT. I don't have MORE MONEY to invest in bargains and have trouble believing stock advice anymore!

    Mutual Funds chosen based upon Morningstar reports for Growth, Income, Intl, Fixed & Money Market have also tanked 47% so I can only sit and wait to see if they'll recover in time for me to buy that fishing boat in Key Largo.

    I've stopped watching TV news until the elections are over (except for local traffic reports).

  • Report this Comment On October 13, 2008, at 4:28 PM, DeathBySnooSnoo wrote:

    Catnapper,

    You make some good points, but...they've been preaching a downturn since 2003! In other words, they missed out on four years of the bull before their predictions eventually, inevitably came true?

    If I preach bull long enough, it will eventually be correct. And if I preach bear long enough, it will eventually be correct. But if you preach bear four years too soon, you're worthless.

  • Report this Comment On October 14, 2008, at 6:39 PM, sumbawa wrote:

    To Llandryn and HuskyBytes,

    While short term money should be in cash or medium term bonds, you also have to consider your long term asset allocation and, critically, risk tolerance.

    While stocks still are the best investment over the long term, short-term volatility can be stomach-churning. As we're seeing this year. Many people, including myself, are discovering limits to their risk tolerance this year. So with this year in mind consider this: instead of having 100% of long-term money in stocks, would perhaps 75:25 or even 50:50 be better in terms of sleeping well? With a 50:50 stocks:bonds allocation you only experience half the losses in bad years but conversely only half the gains in good years. But you might sleep better.

  • Report this Comment On October 14, 2008, at 7:25 PM, rdotson310 wrote:

    Where is the cash going to be coming from? When margins are called in the money is gone, it dosent just apear back the next day ready to be invested again.

  • Report this Comment On October 17, 2008, at 10:35 AM, mgallipo wrote:

    I have to confess the section on "overowned" stocks confused me a little bit. Yes, the stocks all have double digit negative returns. But, no matter what time frame you look at, almost all of them have outperformed the S&P 500. MTD, all but PEP have outperformed (and PEP botched earnings during that period). Over 1 month, only PEP and AAPL are lagging and over three months only AAPL is lagging the benchmark (PEP is ahead even WITH an earnings miss). So I would argue that the declines in those names are not because they are overowned by institutions, but rather because they are stocks, period. A true bear market has a gravitational pull that tends to suck almost everything along with it.

    Now, having said that, had he chosen to highlight stocks overowned by hedge funds, that would have been different. Everything from Oil to E&C to Ags to general high fliers like AAPL and ISRG have been trounced due to massive hedge fund deleveraging.

  • Report this Comment On October 17, 2008, at 3:02 PM, SmithEdge wrote:

    What about the stock Slumberger and Dreamworks? Should I hold on to them?

  • Report this Comment On October 17, 2008, at 5:18 PM, doubtingfool wrote:

    I am glad to see Mr. Buffett purchasing preferred stocks but am irritated by the would-be pundits who describe these recent investments as a "vote of investor confidence". An investment in preferreds is not a sign of common stock trust. It suggests one is offering a way to enhance a debt problem for a company, while protecting capital in a rational, legal, and lower risk investment. It gives equity increase to GE and GS, without needing to bet on this market's growth.

  • Report this Comment On October 17, 2008, at 5:32 PM, ValuHntr wrote:

    Catnapper,

    I've been thinking about some of the issues you raise about MF for some months. I went largely to a cash position in 7/2007. At the same time I let my SA subscription lapse and kept only my Value Advisor subscription. I've let many of their recommendations pass without action from then to now. Probably my timing on the sell side was just blind luck, yet there was plenty of smoke in the air about the sub-prime and derivatives issues then and that was a large part of my impetus to re-allocate my portfolio. I remember well that there was plenty of smoke regarding the excesses prior to the .com bubble bursting also (Greenspan at least 2 yrs prior). I didn't sell then. That memory was what prodded me to action in 2007. Although Deathbysnoosnoo has a point, we must remember that calling the top or bottom (market timing) with certainty is considered impossible. Even now Warren Buffet is buying and at the same time saying he isn't sure this is the bottom, only that he sees value at current prices; after sitting on treasury bonds and holding no stocks (his personal account) for the duration of this bull market....so Myanville looks great in compaison. With that said, I feel that MF missed the boat on this one; and I feel let down. There simply wasn't enough focus on the market fundamentals compared to the specific stock fundamentals that were being recommended. Most stocks follow the market and most have declined with the market during this....correction(?). It appears their skills in understanding and properly weighing market fundamentals is lacking. In the case of many of the stocks I believe they should have been advising us to take at least some of our money off the table, and build a cash position just in case. If they called for such a strategy I missed it. With that said, MF has always included in their mantra that each investor has the responsibility for doing their own homework in addition to what they provide for thought. Ultimately, we must all take responsibility for our investment decisions which may start with subscribing to a MF publication and needs to end with our own analysis before putting our wealth on the line. Fool on!

  • Report this Comment On October 17, 2008, at 8:16 PM, WETSUN wrote:

    I"m following your seven recommendations for Income very closely. I lost heavily the last time we had the stock drops. I'm gun shy now to buy anything, especially at age 88. Where is the Bottom? ACAS appeals to me as does ALD and ATN.

    My real concern is the amount of Life I have Left and How Long it's going to take for the market to recover. Nothing really important will happen until Voters Demand and Get: Repeal of the 16th and 17th Amendments. Nothing.

  • Report this Comment On October 17, 2008, at 8:31 PM, WhidbeyIsland wrote:

    Repeal 16th and 17th Amendments?

    Than what important things will happen?

  • Report this Comment On October 17, 2008, at 11:23 PM, JCoeur wrote:

    Bargains. Great. What do I use for money to buy them?

  • Report this Comment On October 18, 2008, at 9:41 AM, JMDtacoma wrote:

    If mutual funds are so vulnerable to the irrational whims of shareholders as are each and all of their held positions, then the buy-and-hold (vs be prepared to get out) mentality IS always counter-productive in such a 'corrective' crash as 2008. The funds won't have the cash to take advantage of the 'bargains', and they won't even be able to hold current positions for recovery, so that those who remain in it will lose doubly. Pretty sad commentary for the demise of defined pension plans replaced by 401k and IRA plans, 'fully diversified' (if that is even a useful concept) in The Market or not.

  • Report this Comment On October 18, 2008, at 12:20 PM, karmicnoel wrote:

    A Fool's View:

    Being a "Charter-Member" of the FOOL...

    (which means nothing, other than I have

    been with them since they were no doubt working out of the trunk of their cars)......I find most of the member comments to be in search of a "Mother"..

    ..who neither...

    Tom or David, Bill Mann, Seth, the Admiral and various others offered to be.

    I feel they have always been perfectly honest and right on point.... with their comments, opinions, and analysis of stocks and companies. But the FINAL DECISIONS... are made by YOU.

    If you are looking for "Instant-Gratification," you should no doubt just go to the casinos and let all your money ride on a simple throw of the dice. That's when you get a quick answer...

    either yes or no. However; If one is inclined to become educated in money management....which is a plus for many, as well as myself....I personally feel there is nothing better to be, than to be a FOOL.

    Keep FOOLing Around!

    Michael

  • Report this Comment On October 18, 2008, at 5:48 PM, patjmp wrote:

    No one knows where the bottom is. But everything is priced so much lower than it has been for years. After 911, the president said we should invest in America, so I bought quite a few stocks when the market opened, as prices were low and then started up. So I feel now is the time to buy, and I have been buying again, and I have faith in America and believe the market will rise again, but it may take a few years. If I'm not around then, my estate and family will enjoy the benefits. I'm in it for the long term.

  • Report this Comment On October 19, 2008, at 1:58 PM, kyxysyx wrote:

    Goatsnuff--

    The answer to your ?? on 10/12 is:

    Y E S ! ! !

    Hang in there!!

    kyxysyx

  • Report this Comment On October 19, 2008, at 10:58 PM, MARKECRUZ1 wrote:

    I NEED A LITTLE HELP.IM NEW AT INVESTING.CAN SOMEONE TELL ME WHAT ARE THE SYMBOL FOR WIND ENERGY STOCKS?

  • Report this Comment On October 20, 2008, at 2:20 AM, saga1966 wrote:

    All right some are bulls and some are bears on the US markets, and rightly so,for valid reasons. If the short term is not certain don't you think it's better to look at some international markets. I hear tiny islands like SRI LANKA, has been fairing well in terms of handling the shocks in comparison to the Large and developed Countries. Can any one comment on that?

  • Report this Comment On October 20, 2008, at 2:21 PM, rickietoc1 wrote:

    The ursary law should be re-enacted.

    And let's try (again) to print our own money (interest free) like Lincoln and JFK did. Although they didn't fare too well right after they did this. Executive order 11110. Green backs/ 2 dollor bill. They did'nt live long after having money printed by someone other than the Federal Reserve Bank. (Private Bank). Federal my *ss. With this privately owned bank in charge of the money we will never get out of debt. Mathematicly impposible.

  • Report this Comment On October 20, 2008, at 10:37 PM, WillduRANT4 wrote:

    RE: On October 19, 2008, at 10:58 PM, MARKECRUZ1 wrote: Report this Comment

    I NEED A LITTLE HELP.IM NEW AT INVESTING.CAN SOMEONE TELL ME WHAT ARE THE SYMBOL FOR WIND ENERGY STOCKS?

    http://www.altenergystocks.com/

  • Report this Comment On April 23, 2009, at 12:44 PM, RugFund wrote:

    Investing Laws of RAM Funds

    1. You should never be fully invested in the market as bargains may come along that look attractive therefore we recommend having 5-10% of your portfolio in cash or cash equivalents

    2.You should not be afraid to take a loss; if your money can work better for you elsewhere

    3. Do your homework know your stocks; look for good fundamentals eps growth; low p/b; low p/e ratios; low debt/equity (0.5 or less);history of EPS growth that is strong in the past five years

    4. There is always a bull market somwhere it may be harder to fine but its out there

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