The stock market is tanking, the government is intervening, financial and political uncertainty abounds, and respected money managers -- thanks to redemptions -- are suddenly seeing less and less money to manage. Things are looking a bit grim.
But if you stand back and take stock of the letters these same money managers recently sent to shareholders, you get a very different perspective.
For example ...
Third Avenue's Marty Whitman revealed in his Aug. 11 letter that he recently purchased $1.5 million worth of Third Avenue Value (TAVFX) shares, and noted that he's "especially enthusiastic" about the fund's prospects. According to Whitman, the securities Third Avenue specializes in buying are "trading at ultra-attractive prices" -- such as the yet-to-be-unlocked value at Sears Holding
Bruce Berkowitz told his Fairholme (FAIRX) shareholders that "We continue to ignore the [panicking] crowd." Using sales, new inflows, and "cash held for stressful times," the fund is buying shares of dirt cheap health-care stocks such as UnitedHealth
And then there was Bill Miller, who told his shareholders about a conversation he had with Warren Buffett recently, where they both agreed they were optimistic about the future. Moreover, Miller pointed out that the best time to buy his fund was after its performance had been dismal. By that logic, there has never been a better time to buy Legg Mason Value Trust (LMVTX).
The best money managers are optimistic -- and they're buying.
Now then ...
Don't assume that these money managers are ignoring the current financial calamity. There's no escaping it.
But there's also not much any of us can do about it, other than taking advantage of currently depressed stock prices to buy shares of companies that:
- Will be in business 10 years from now.
- Will be bigger 10 years from now.
- Will generate significant amounts of cash in each of the next 10 years.
Take a company like Nike
Microsoft
The question to ask yourself is not how these companies will hold up in the fourth quarter of 2008 -- it's how they will hold up over the next decade. If they have a durable brand, cash on the balance sheet, and a verifiable track record as a quality operator, then I believe they will hold up quite well.
That's the easy money
If you're willing to dig in and get your hands dirty, however, you can find even better bargains among the unknown stocks that professional analysts and investors simply aren't paying attention to. As Andrew Ross Sorkin wrote in a recent New York Times column, "[I]t is hard to find good research on small companies. All the focus has moved to large companies where the big money is sloshing around."
That is why small caps are the best stocks to profit from the drop -- and why, while I'm happy to reveal some of my best large-cap ideas to you right now, I'm keeping my best small-cap ideas for our Motley Fool Hidden Gems subscribers.
If you'd like to see what they are, you can join Hidden Gems free for 30 days -- you'll see all of our research and recommendations, along with our best bets for new money now. Click here for more information -- there's no obligation to subscribe.
This article was first published on August 22, 2008. It has been updated.
Tim Hanson does not own shares of any company mentioned. The Motley Fool owns shares of UnitedHealth. Sears Holding, UnitedHealth, and Microsoft are Motley Fool Inside Value recommendations. UnitedHealth is also a Stock Advisor pick. Fairholme and Third Avenue Value are Champion Funds selections. The Fool has a disclosure policy.
