An Investment Opportunity of Historic Proportions

It's difficult to have any confidence in today's market. In the past 365 days we've seen a housing bubble pop, a credit crunch ensue, the near-failure of a gigantic investment bank, and extreme -- even "bailout" -- measures from our federal government.

Save for a few specific industries (notably energy, thanks to Chesapeake (NYSE: CHK  ) , Apache (NYSE: APA  ) , and a seemingly unceasing rise in oil prices), stocks have been hit hard. The S&P 500 has rallied a bit in recent days, but it's still off its autumn highs by a little more than 10 percentage points.

You've done worse over the same period time if you're a value investor (the Russell 1000 value index is down 12.5%) and even worse than that if you're a small-cap value investor (the S&P SmallCap 600 value index is down 14.2%). So it goes for a strategy that embraces "losers" such as General Electric (NYSE: GE  ) , Pfizer (NYSE: PFE  ) , and AIG (NYSE: AIG  ) on the large-cap side, and Southern Union and Lennox on the small.

Where is the market headed?
It's no surprise that as stocks have fallen, investors have become more and more anxious and have further sold off stocks. Life savings -- for down payments on houses, retirement nest eggs, a child's education -- are on the line.

But perhaps now's the time to buck up. We don't know what direction the market will take from here, but there are highly accredited professional money managers of the value persuasion who like what they're seeing in today's stock prices.

In his most recent quarterly letter to shareholders, money manager Richard Pzena said he believes "the opportunity has grown." He goes on:

What the current crisis has done is to propel what was a very attractive valuation opportunity in the financial sector to one of historic proportions.

Pzena already has been invested in some financial-sector-related companies, and while those bets haven't worked out so far, he's thinking long term.

He's not alone
Legendary but recently maligned Legg Mason Value Trust manager Bill Miller had a similar take in his quarterly letter to fundholders:

That sets the stage for what should be an improving environment for investors in stocks. ... With most investors being fearful, I think it makes sense to allocate some capital to the greedy side of that pendulum, and that means putting cash to work in equities.

Then there's the team that runs Dodge & Cox Stock -- which has outperformed the S&P 500 by five percentage points per year over the past decade! You'll see a variation on this same theme in recent remarks:

As investors continue to grapple with disappointing news about credit market dislocations and the near-term U.S. economic outlook, we believe that significant investment opportunities are being created for the patient, long-term investor.

Four out of four smart investors agree
Finally, there are these cautious, but upbeat, words from Ian Cumming, the chairman and president of Leucadia National (NYSE: LUK  ) :

It may take quite a while for the scrubbing of balance sheets and the unwinding of leverage to come to an end, and we suspect that not all will survive. ... We are confident that the financial system will repair itself and to learn to better distinguish who is a worthy borrower and what is a worthy loan. On the bright side, opportunities for courageous investors should abound.

So, to recap:

  • The market downdraft has created more opportunities in today's market.
  • Most investors are fearful, but noted money managers are putting cash to work in equities.
  • To take advantage of those bargains, investors need to be patient and courageous.

Rock, meet hard place
That last point is what makes it so tricky for individual investors to make big money in the stock market. We're hardwired to be neither patient ... nor courageous.

But if you count yourself among those who feel more comfortable sitting on the sidelines today, consider reassessing your decision sooner rather than later. Because there will come a time when you and people like you will decide that it is safe to get back into stocks. When that happens, the market will jump and valuations will skyrocket.

You want to be fully invested before that happens. Trust us. After all, it was a lot better to buy Google (Nasdaq: GOOG  ) the day before its recent fantastic earnings report caused the stock to jump more than 20%. Sure, you could have been early to the story, but if you can tolerate any volatility, know that great companies like Google -- and like the market at large -- prevail in the long term.

Change your POV
As you can probably guess, we've struggled with volatility at our Motley Fool Hidden Gems small-cap value investing service. As advisor Bill Mann wrote in our recent review issue, "Investors have come to some sobering realizations: Casinos can't print money in good times and bad, and housing prices don't only go up, for example."

But like so many great investors, we're banking on the long term and taking advantage of current pessimism to build out positions in the companies we admire most. In fact, we just completed a six-month review issue and re-recommended a financial company that's woefully undervalued.

Will it rise tomorrow? Of course not. But its prospects are bright.

If you'd like to learn more about that financial company as well as all of our top picks for new money, click here to join Hidden Gems free for 30 days. There is no obligation to subscribe.

Neither Tim Hanson nor Brian Richards owns shares of any company mentioned. Chesapeake and Pfizer are Motley Fool Inside Value recommendations. Pfizer is also an Income Investor pick. The Fool has a disclosure policy.


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