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'll 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?

Our economy is likely headed for some rough times, but there's little doubt that the United States 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."

Lately, Buffett's been busy putting his money where his mouth is. He has made high-profile investments in General Electric's and Goldman Sachs' preferred stock, and he's 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, because of 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. In 2008, equity investors withdrew over $215 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 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 $215 billion doesn't even include hedge fund managers who are forced to sell stocks because of 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 few months, 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:


Institutional Ownership %
(as of last quarter)

Stock Performance
Over the Past 8 Months

Charles Schwab (Nasdaq: SCHW  )



ConocoPhillips (NYSE: COP  )



Harley-Davidson (NYSE: HOG  )



Kimberly-Clark (NYSE: KMB  )



Leucadia National (NYSE: LUK  )



Merck (NYSE: MRK  )



Pfizer (NYSE: PFE  )



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 tangible reasons for these losses (declining energy prices, expensive acquisitions, and concerns about consumer spending in a tough economy, etc.). But really, these are seven solid companies that will still be making money years from now, yet their shares have all slumped horribly over the past eight months. The fundamental quality of these businesses has not deteriorated -- only their 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. It's free for 30 days -- click here for more information.

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This article was first published Oct. 10, 2008. It has been updated.

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. Charles Schwab and Leucadia National are Motley Fool Stock Advisor selections. Pfizer is an Inside Value recommendation, while Kimberly Clark is an Income Investor selection. CGM Focus is a Champion Funds pick. The Motley Fool has a disclosure policy.

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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 June 19, 2009, at 8:41 AM, catoismymotor wrote:

    I own LUK and look forward to buying more shares. I like the fact it is a conglomerate run by the same two people for the last thirty years. Once the economy picks up LUK should start down the path of excellent returns. Until that time their holdings that thrive on the public's mad money (winerys, resorts, casinos) will continue to be a weight on their overall numbers. Their other holdings in raw material and precious metal producers should keep them in the black in the mean time. Do some homework on this one.

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