In the short run, our financial markets measure nothing more than investors' near-term outlook for the economy. With a little bit of confidence in the system, banks would start lending again, investors would start buying stocks again, and the global economy could begin to heal itself.
That's not happening -- because we're not confident. We're pessimistic. A recent report found consumer confidence in the U.S. at an all-time low, with one economist calling the data "extraordinarily awful."
But that extraordinarily awful data could prove to be very good for you.
Here's how
Chuck Akre is a money manager and a white-haired dispenser of plainspoken wisdom. He's also had an extraordinarily bad year.
His FBR Focus Fund (FBRVX) was down 34% in 2008, with holdings in Markel (NYSE: MKL ) , AmeriCredit (NYSE: ACF ) , and Bally Technologies (NYSE: BYI ) having taken particularly hard hits.
Yet when Chuck stopped by our offices recently, he put aside his performance and said with a smile that times like these are "nirvana for the value investor." That's because good companies are on sale across the board, for reasons that have nothing to do with their long-term intrinsic value.
Here's why
Chuck noted that three groups might normally be buying stocks now; instead, for a variety of reasons, they're either sitting this market out or pulling money from the market. They are:
- Individual investors, because they're scared witless.
- Corporations, which aren't repurchasing cheap shares because they need to hoard cash to survive the credit crunch.
- Hedge funds, which are shifting toward cash to meet demand for redemptions.
That creates across-the-board artificial downward pressure on stocks, and it's the reason cash-rich names such as Taiwan Semiconductor (NYSE: TSM ) , Charles Schwab (Nasdaq: SCHW ) , and Altria (NYSE: MO ) were selling recently for around 10 times trailing owner earnings.
Again, that's nirvana for the value investor.
A thought experiment
Now, go back to the end of 2007, when you were thinking about buying Schwab for $26 per share. If I'd told you then that in a little more than a year, you'd be able to buy that same dominant company for less than $20 and at one point less than $12, you (1) would not have believed me, and (2) would have considered that a fantastic buying opportunity.
Well, here we are. The entire market was down almost 50% and remains significantly below its highs. But instead of backing up the truck on cheap stocks, the three groups of investors I mentioned above are selling them. Even a seasoned money manager like Chuck Akre has been getting calls from longtime clients demanding that he go to cash.
A call to action
We haven't seen sustained and widespread pessimism like this since the Vietnam War and stagflation combined to depress the heck out of folks in the 1970s. But, as Chuck was quick to point out, the 1970s were a buyer's market for many stocks.
Today, Chuck is lining up beside investing luminaries such as Warren Buffett, Charles Munger, Bruce Berkowitz, Marty Whitman, and many more. All of them are declaring that now is a good time to buy stocks, and all of them are going out and doing so.
So, what are you doing? If you're looking to take advantage of current pessimism to buy up cheap, high-quality companies, join Motley Fool Stock Advisor free for 30 days and read all about Fool co-founders David and Tom Gardner's top picks for new money now.
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This article was first published Oct. 30, 2008. It has been updated.
Tim Hanson doesn't own shares of any companies mentioned. Schwab is a Motley Fool Stock Advisor recommendation. Markel is an Inside Value choice. The Motley Fool owns shares of Markel. You can be confident in the Fool's disclosure policy.
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