Attention, Shoppers: Blue Chips Now on Sale

It's hard not to be terrified right now.

The market is down 40% since October 2007, as overleveraged markets meet overleveraged consumers and, well, the whole thing explodes. Names like AIG (NYSE: AIG  ) , General Motors (NYSE: GM  ) and Merrill Lynch (NYSE: MER  ) , which were once exemplars of American business, continue to crumble before our very eyes. And the 24-hour news cycle just keeps feeding us stories of our own impending economic doom.

We're like thoughtless children who insist on staying up late to watch slasher flicks, then find ourselves unable to sleep. I suppose we're just gluttons for punishment.

But not everyone is terrified.

Shark Week
Some of the best investors in the game -- Buffett, Akre, Tilson, Ackman -- are not only not terrified, they're hungry. In fact, they're consuming discounted, high-quality businesses with the ferocity of a Great White at a sea-lion convention.

They're not avoiding the terror the rest of us are feeling because they're not paying attention, but because they subscribe to a very simple and very different notion of market risk than the rest of the investing herd. In the words of Benjamin Graham, "the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions."

In other words, when everyone else thinks it's a great time to be in the market (maximum optimism), these folks are one step away from closing up shop. But the inverse is also true: The chief gains come from the purchase of high-quality businesses at times of unfavorable business conditions. And that looks a lot like what we're seeing right now.

The time to run is past
But too many investors aren't following their example. Instead, they're incurring extraordinary costs to house their money in "safer" places right now. Investors in stock mutual funds have pulled out a net $124 billion year to date through September -- and investors in money market funds have added a net $198 billion. But there are two significant problems here.

First, there is no such thing as a "safe" investment. Any investment that will earn you more than what inflation will take away depends on some level of risk -- and that means that even "safe" investments sometimes go bust. Just look at financials, which were for many years touted as some of the safest, most recession-proof options around.

Second, while the news stories are busy raising everyone's blood pressure, savvy investors know that today is not the most dangerous time to invest. It was, oh, about 13 months ago, when the market was at all-time highs, pushing aggressive valuations and expectations. Only our new knowledge makes today's market seem more dangerous; in reality, the risks are about the same -- or even smaller.

The markets have absorbed serious punishment lately, and while that's made them more volatile, it's also reduced much of the downside potential. And that's where you should come in.

Become a shark
As Chuck Akre of Akre Capital Management quipped on a recent visit to Motley Fool headquarters, "no one rings a bell at the bottom of the market telling you to get in." We may be at the bottom, or the market may have some falling left to do. Either way, we'll likely continue to see volatility.

But I believe (and Chuck agrees) that it's far easier now than it has been in quite a while to identify a great business trading at a discount to its true worth. According to Akre, today's market is "nirvana" for the value investor, since we haven't seen valuations like this since the 1970s.

Simply put, there are many businesses out there with strong economic foundations and sound management -- priced as though we're never going to recover from this mess. But we will.

For example, examine these four high-quality businesses:

Company

% Change since October 2007

P/E October 2007

P/E Today

Target (NYSE: TGT  )

(49%)

18.7

10.6

Intel (Nasdaq: INTC  )

(49%)

34.2

11.0

Walt Disney (NYSE: DIS  )

(42%)

18.0

9.2

Yum! Brands (NYSE: YUM  )

(27%)

26.3

17.4

While I don't necessarily recommend these as investments (there are many similarly good options to research), there's a larger point to be made: The more favorable risk/reward balance we're seeing now means that this is the time to be putting new money in the market.

The Foolish bottom line
Even though the macroeconomic news is grim, the market lows we've been seeing are good things for long-term investors -- because they're offering some of our strongest blue chips at discounts we haven't seen in a very long time. The great investors earned their stripes in markets like this one, not with outsized intellects and legions of analysts, but with patient temperaments and long-term mentalities. You can do the same.

Our Motley Fool Stock Advisor started in 2002, in a market much like this one. We look for companies with dedicated and responsible management, sound financials, and prices below their intrinsic values. We're seeing a lot of good options right now, and our picks are beating the S&P 500 by an average of 25 percentage points. You can click here to try the service free for 30 days -- there's no obligation to subscribe.

Fool Nick Kapur's golf clubs sit in his hall of unused sporting goods. He owns no stocks mentioned here. Walt Disney is a Stock Advisor recommendation. Intel is an Inside Value recommendation. The Fool's disclosure policy watches scary movies for fun.


Read/Post Comments (0) | Recommend This Article (18)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 775658, ~/Articles/ArticleHandler.aspx, 11/29/2014 1:38:58 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement