This Is the Least Risky Market in Years

Many investors are worried about how much further the market has to fall.

But that's a huge mistake. These are the least risky market conditions we've seen in a long time.

Quite simply, if there ever were a time to invest without reservations, now is that time. Why?

Despite what modern portfolio theorists will tell you, for an investor, risk isn't defined by how often share prices go up and down. That's just volatility, and though it can be stressful, it's meaningless in the long run.

Real risk, on the other hand, is the probability that you'll lose the capital you've invested -- forever.

Rule No. 1: Don't lose money.
To see why this is the least risky market in a long time, let's look at the margin of safety -- the gap between a company's estimated intrinsic value and its market price. 

The margin of safety accounts for the possibility that an investor made mistakes in calculating a company's value. (Since that calculation's based on judgments and assumptions about the future, there are always errors.) It helps to ensure that you are, in fact, buying stocks for less than they're worth.

Since the market is mostly efficient, stocks will eventually return to something like true value. The higher the margin of safety when you buy, the less risky that investment really is -- because it's less likely that you'll lose that capital than it is that the stock will make that return over time.

Rule No. 2: Remember Rule No. 1.
When market prices tumble, that margin of safety -- at least for solid, well-capitalized companies -- grows.

And that means that right now, there are some excellent businesses selling with significant margins of safety.

Bill Ackman of Pershing Square Capital, an activist hedge fund which owns a substantial stake in companies like Wendy's/Arby's Group (NYSE: WEN  ) and General Growth Properties (NYSE: GGP  ) , explains the current market environment this way, "Risk is high now for the leveraged short-term investor, but actually much lower for the unleveraged, long-term investor in high quality, mid and large capitalization, modestly leveraged businesses."

Which means ...
As my Foolish colleague Rich Greifner put it: This is the opportunity you've been waiting for.

During 2008, only 14 companies in the S&P 500 Index -- just 2.8% -- ended the year with a gain (not including dividends). Those that did end in positive territory were largely those that offered value to consumers, such as Wal-Mart (NYSE: WMT  ) and McDonald's (NYSE: MCD  ) .

Though consumer spending has waned, unemployment has risen, and economists have finally declared a recession, does it really make sense that the other 97.2% of American businesses are less valuable than they were a year ago?

No!
Take S&P 500 member and Motley Fool Stock Advisor recommendation National Oilwell Varco (NYSE: NOV  ) , for instance. Analysts expect that its final 2008 numbers will show more than a 35% increase over 2007's sales. In fact, numbers reported in September already showed sales up 33.4% over the previous year. But it lost nearly 70% of its market value in 2008.

But has anything fundamentally changed? No. Although the price of oil has come down significantly, the company's products are in steady demand regardless of what oil trades for. With a solid balance sheet and $11.8 billion in backlog, temporary commodity fluctuations should have no bearing on this company's long-term prospects.

In other words, this supplier of oil and gas drilling equipment is less risky now than it was four months ago.

Something similar is true of Morningstar (Nasdaq: MORN  ) and UnitedHealth Group (NYSE: UNH  ) , as well, which are also strong companies that have seen their share prices slashed over the past 12 months.

In the most recent issue of Stock Advisor, David and Tom Gardner recommended two more companies that are down substantially from their 52-week highs, and which offer a significant amount of upside potential (read: margin of safety) for long-term investors -- one of which rewarded investors with gains of more than 750% the first time it was recommended to subscribers.

I invite you to take a peek at these two picks today, completely free. Our 30-day free trial lets you see all past issues, and there's no obligation to subscribe. But if you've ever considered joining the service, this is the time -- because now through Tuesday, Motley Fool Stock Advisor is offering a special Inauguration sale. You can now get a 12-month membership for only $99 -- a more than 30% discount. Click here for more information.

Adam J. Wiederman owns no shares of the companies mentioned above. The Motley Fool owns shares of Morningstar and UnitedHealth Group, which are Stock Advisor recommendations. National Oilwell Varco is also a Stock Advisor recommendation. Wal-Mart and UnitedHealth Group are Inside Value recommendations. The Motley Fool's strict disclosure policy can be found here.


Read/Post Comments (18) | Recommend This Article (47)

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 January 16, 2009, at 3:19 PM, 181736065 wrote:

    This "stinks" of "market timing".

    I thought a MF tenet was that you can't time the market?

    Bill J.

  • Report this Comment On January 16, 2009, at 3:34 PM, SteveTheInvestor wrote:

    Less risk? Suppose that depends on who you talk to. You know, like when I bought Vasco based on a Stock Advisor recommendation and it quickly dropped 40%. Of course, my thought was that I should sell it in that any stock that could drop 40% in a day or two could drop a lot more. But no.... I just need to be patient. Of course, now I'm down well over 60%. Doesn't hardly even matter in my portfolio now.

    To cite 52 week highs is pointless. This isn't the environment we had 52 weeks ago. What are the companies worth right NOW! It sure isn't what they went for 52 weeks ago.

  • Report this Comment On January 16, 2009, at 5:09 PM, MotleyGulibles wrote:

    Fools,

    I request that you please not send me your blanket promo mail as the sole repply to my inquiry. I am not one who is conditioned to this kind of impersonal response. If you hype service, then offer service! If it ever dawns on you to ever interact with your client base in a different manner you might well benefit from it.

    After the dire yearly (08) results of MDP, it is insulting for any educated individual to receive your PRO service hype. Your best PR would be to have those who subscribed at the onset of MDP, receive 6 months free so as to offer them the opportunity to recoup part of their losses, or simply as an elegant move on your part.

    Why would anyone trust this new PRO service and pay $1499.00 after being burnt by MDP? MDP was supposed to be your cream of the crop and we tanked with it. Including some very poor strategy on the part of the Fool.

    Trust me the Fool hype is your worst enemy, your constant promo mails and the conflictive information within the free newsletters does not serve you well or does it entice to subscribe. And for those that do, you might want to honor your client commitment with some good strategy and decent results.

    Madoff was thought to be a genius when offering his "privileged clients" 8-12% and he tanked because it was unsustainable and had to go Ponzi. MF, if you are the geniuses you pretend to be, why don't you create a fund that will outpeform the markets? Presently there seems to be a vacuum you could fill. Or is hype a better way to go?

    Regards.

    J.H

  • Report this Comment On January 16, 2009, at 10:45 PM, 181736065 wrote:

    J.H.

    Yeh, I hear you when you say..."MF, if you are the geniuses you pretend to be, why don't you create a fund that will outpeform the markets?"

    But, now with Pro, TMF has a secret weapon: a "NASA Scientist" working for them! Wow!

    TMF has sunk to new lows with the "Pro" hype (Outragous returns based on covered call options. Implying that they will make 15% even in "down" markets. Please!). Deception and wishful implications.

    I'm surprised David Gardner even put his signature on it.

    But, I guess that says where he is really at, and where tMF is heading He's proving to me more and more every day that he's in it more for the money, and that TMF is turning more and more every day like those cheap "I turned $500 into $millions" circulars I get in the mail and promptly dump in the garbage.

    I expected more from TMF.

  • Report this Comment On January 17, 2009, at 11:27 AM, derfahrer wrote:

    It really is crazy that all these articles end with a pitch for a for-$$$ service.

    The flaw in his logic of prices returning to their 'true value' ... is that the value 4 months ago was not the 'true value'! If the true value is lower still ... well, then ..

  • Report this Comment On January 17, 2009, at 11:51 AM, oldgoldbug wrote:

    Much like the perma-bears, the perma-bulls will be correct, in time - you just have to be "patient". Being "patient" in 2008 was a -40% experience but the good news is that a 70% up move will get you even. How long it will take is anybody's guess.

    BTW, I recall reading an article on the Business Week website about a very highly regarded money manager complete with a picture of his corner office overlooking NY harbor and I would guess a multi thousand dollar pinstripe suit who had just increased his holdings of FNM dramatically - at $35 per share!!! I paraphrase but he told the reporter "the fundamentals are very good and there is significant value in the shares". No offense intended MF, but if he can be wrong, anyone can be wrong.

    Having said all that, the chart on WEN looks pretty good - I guess we all have to decide for ourselves. Turning it over to someone else is perhaps not the best idea.

  • Report this Comment On January 17, 2009, at 4:01 PM, wuff3t wrote:

    "This "stinks" of "market timing"..."

    How? The author is just saying that current conditions present you with an opportunity to pick up cheaper shares in companies whose underlying value has not changed in the same way their stock prices have. It would be market timing if they were telling you to wait because they thought prices might go lower, but they're not. They're saying prices look cheap, so take advantage.

    "What are the companies worth right NOW! It sure isn't what they went for 52 weeks ago..."

    The point the author is making is that there is a distinction between share price and underlying value, and that the crash in share prices does not necessarily reflect a crash in underlying value. In other words many of the companies mentioned ARE worth what they were a year ago, and the fall in share prices is driven by panic, not real valuation concerns, and so presents an opportunity.

  • Report this Comment On January 17, 2009, at 6:04 PM, 181736065 wrote:

    Hi wuf3t,

    And what if I were to say that we are entering a "stagflationary" environment and earnings would be cut in half for the next ten years?

    ANd therefore, stocks are overvalued - because the "margin of safety" is non-existent, therefore the risk is too high.

    See,it's all a matter of perspective and speculation.

    If you subscribe to TMFs tenet, you cannot "time the market". And any implication otherwise is bogus.

  • Report this Comment On January 17, 2009, at 8:45 PM, motleyferg wrote:

    Let's say over the next five or ten years, thanks to U.S. government policy, cumulative inflation is 50%. And let's say that government policy causes economic stagnation, so that corporate income starts wounded and stays flat, and stock prices stagnate like they did in the 1970's. If you jump in now, your assets lose half their real value, right? Or say you just put your money in TIPS. Your money more or less retains its true value, right? So what are the chances of the above? Is the stock market really such an obvious bargain?

  • Report this Comment On January 18, 2009, at 8:04 AM, wuff3t wrote:

    fe3lixallen,

    My understanding of market timing is that it involves trying to make predictions of peaks and troughs and making your investments accordingly, and that wasn't how I read the article. I felt the author was saying that the current climate presents an opportunity not to be missed.

    You could be right about stagflation! But trying to stay positive there's always someone making money - even if it's out of other people's misery. So hopefully there will still be chances for us to make money. Earnings might be down on average but some companies will adapt and thrive.

    Spotting them is the difficult bit, obviously...

    Anyway, good luck to you.

  • Report this Comment On January 18, 2009, at 10:25 PM, bodjewels wrote:

    Every comment I read in this column is extremely negative and as chicken little said the sky is falling and the comments make an extremly good case for the falling sky.If not a sky a very dangers down market for many years that could wipe out many investors and leave us nothing for out later years but , a job digging ditches at min. wage. So we should get ready for the soup kitchen with a piece of bresd.

  • Report this Comment On January 18, 2009, at 10:53 PM, letitgrow100 wrote:

    dont forget the little boy asking..."please sir! may i have some more"

  • Report this Comment On January 19, 2009, at 2:49 PM, wuff3t wrote:

    "Every comment I read in this column is extremely negative..."

    Er - mine weren't! I think Buffet is right: betting against America has never been smart. It will be a rocky ride but the US economy will right itself.

  • Report this Comment On January 19, 2009, at 6:42 PM, redneckdemon wrote:

    I recall reading about how everyone thought the world was over during the great depression, but we are still here. Being "Patient" is never fun, and usually not easy, either. But if you can do, things will get better.

    If you bought a good company a 6 months ago and watched its price drop 40 to 50%, well that sucks. If you sell it now, your out a lot of cash. If you had never bought it, would would you have done with your money instead? Odds are you would have bought a different company, with the same or similar results.

    My point is, if your money is in a good company, or a wise investment, and the underlying foundations that prompted you to put your money there to begin with haven't changed, what's the problem? Give it some time, and you'll get your money back with a profit. If you need your money RIGHT NOW, well what the heck are you doing investing that cash in the first place?

    The ones I feel bad for are the folks who did things right for years, and need to cash out their money and enjoy it now. 30 or 40 years of smart investing and retirement planning, and now this.

    I'll tell you though, with prices across the board this low, I'm wading in. Not whole hog, cause you never put all your eggs in one basket, but I see no reason not to put some money in the market right now, except for all the End of the World predictions I have been reading in the supermarket tabloids for years. The U.S. isn't going to shivel up and blow away anytime soon. It will be a tuff and very bumpy ride, but we will still be here, and that means money will be changing hands.

    I'll be the guy selling disposable cameras on doomsday.

  • Report this Comment On January 23, 2009, at 9:56 PM, wtcccoach wrote:

    I'm a subscriber to MDP. While I'm extremely dissapointed in thier current stock picks I also realize that the market as a whole is beaten down. If they were beating the SP then I'd be impressed. I do feel that pushing a new service is very dishonest. How can you ask subscribers to purchase a new service when your old one is performing poorly. Another point is that what will subscribers do about their current portfolio in MDP if the Motley Fool is pushing the PRO version. What is most frustrating is the price that are seeking. $1500.00 dollars is a large sum of money to invest in a service that hasn't even been proven to work. If they want me to invest my money then give me a year for free and beat the market. At that point I'd be glad to subscribe.

  • Report this Comment On January 24, 2009, at 1:21 PM, weownthenight wrote:

    1. A market that we have been experiencing normally takes more than a decade to resolve itself. This malaise started late March 2000 and will work its way out sometime in 2012-15. Now how do I know this? Because of all the times it has happened before. If you don't care about the past, why bother about the future? There will be cyclical bull runs but nothing like we had from 1982-2000

    2. Look at 30 year stock charts of the best companies and you will see they move up for 1 1/2 to 2 1/2 years then take a breather for 6 months to 1 1/2 years. You don't need to look at every stock. the top twenty per cent will give eighty per cent of the stock market movement. In fact during the '90's, the top twelve stocks in the S&P 100 provided 67% of that index's move

    3. Stay away from labor intensive companies with heavy union contracts and don't buy fads ie solar, wind and all the travelling medicine man enviro wacko crap.

    4. Study the markets don't take someone elses word. You will see recurring patterns and cycles. Spread your money around on the quality issues Only take a flyer on risky stocks with after tax dividends and interest. And when doing so, no more than 4% in any one security.

    5. The market low will be marked by a 7-9 S&P P/E ratio.Tuttle Asset Management has a 100 year chart with corresponding P/E's Currently that P/E is just under 18 so the market has to drop by half with earnings remaining the same or earnings have to double with prices staying the same. We know both earnings and stock prices will drop and stock prices will rise at least 6 months before the earnings cycle bottom is in place.

    6. We also know major secular bears have double bottoms - a "W" formation. That has not formed and to do so the market must move up creating a bear trap. Be careful and when you realize you have been trapped swallow your pride and get thee the hell out

    7. Lastly when a voice tells you to do something ie you get this gut feeling to take a flyer do it and don't let somebody talk you out of it. Just follow common sense and the rules.

  • Report this Comment On January 24, 2009, at 1:28 PM, JCoeur wrote:

    Maybe the next pitch should be" Hey, if you were smart enough to ignore out previous advice, congratulations! You now have some money left to invest in our latest scheme!"

  • Report this Comment On January 24, 2009, at 1:29 PM, JCoeur wrote:

    redneckdemon wrote:

    "The ones I feel bad for are the folks who did things right for years, and need to cash out their money and enjoy it now. 30 or 40 years of smart investing and retirement planning, and now this."

    Thanks, red, I appreciate that.

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