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How Bad Will It Get?

It's grim out there. The market is down 30% since the beginning of September. The financial contagion that started with the U.S. subprime mortgage defaults has spread to Europe and Asia. Fully 60% of Americans in a recent survey believed that a depression -- replete with 25% unemployment and widespread homelessness and hunger -- is "likely." And just 9% of Americans, an all-time low, were satisfied with the way things are going in the country.

It's gotten so bad, in fact, that the Booyah Bull himself, Jim Cramer, told investors recently to pull any money they need for the next five years out of the market.

Now, that's not necessarily bad advice
Of course, you should never be investing the hard-earned dollars that you need to pay your bills over the next few years. But if you heed the wisdom of the late Sir John Templeton -- whom we recently eulogized as the world's most important investor -- you should always be ready, willing, and able to invest some of your long-term savings in common stocks at -- and this is crucial -- the point of maximum pessimism.

What can happen when you buy at the point of maximum pessimism? Well, as Sir John proved when he famously purchased 100 shares of 104 companies trading for $1 per share or less in 1939, as the market panicked at the outset of World War II, you can make a lot of money.

The good news for you today is that given that data presented above, we're getting pretty darn close to that point -- only 9% of Americans are left to be convinced.

An important caveat
This, however, does not mean that the market has bottomed. It could well get worse before it gets better, particularly since the credit markets remain frozen and home prices look like they have a bit more "rationalizing" to do.

But some stellar businesses are already selling at hefty discounts to the norm:


Current P/E

5-Year Average P/E

Coach (NYSE: COH  )



Hansen Natural (Nasdaq: HANS  )



McDonald’s (NYSE: MCD  )



Yum! Brands (NYSE: YUM  )



Sysco (NYSE: SYY  )



Data from

Are you brave enough to start today?
Rather than trying to time the market and catch these names on the way back up, start dollar-cost averaging into an array of superior names now (remember, Sir John purchased shares in 104 companies) with a commitment to holding shares for the next five years or more. That's the only time-tested way to turn current market volatility to your advantage, and the rewards will be great for those with the courage and resources to do so.

The key, though (and this bears repeating), is to average in -- keeping some money on the sidelines if the market continues to drop -- and add new money, even in small amounts, on a regular basis. That's a particularly prudent tack today, given the low costs of trading and the violent unpredictability of today's stock market.

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; full access is free for 30 days. Click here for more information.

This article was first published Oct. 9, 2008. It has been updated.

Tim Hanson owns no shares of any company mentioned ... yet. Coach is a Motley Fool Stock Advisor recommendation. Sysco is an Income Investor selection. The Motley Fool's disclosure policy is a good one, gosh darn it.

Read/Post Comments (3) | Recommend This Article (3)

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 December 13, 2008, at 8:02 PM, SteveTheInvestor wrote:

    You probably should have mentioned that the P/E's in the 5 year period you cite were born in a bull market recovery and were maintained by consumers who spent too much time riding the fantasy spending bus. Well, the bull has been shot dead and the bus drove off the side of a mountain.

    To me that means the current P/E's are nothing to get excited about and they don't exactly qualify as bargains.

  • Report this Comment On December 13, 2008, at 8:22 PM, Jimmy2008 wrote:

    What would have happened if late Sir John Templeton had bought stocks at the low in 1930 (already maximum pessimism)? How long would it take for him to recover his capital?

    Just curious.

  • Report this Comment On December 13, 2008, at 8:33 PM, goldenthroat wrote:

    trying to pick the right time to start collecting SS. Right now I'm 60 and working. Full retirement age of 66 seems about right but any opposing thoughts are welcomed. Thanks

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