Calling the Bottom ... or Not

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As subprime woes continue to pummel any company with the word "financial" in its name, the housing industry takes on the appearance of a tattered double-wide, and retailers hold a fire sale on their shares, the market is challenging investors' faith. But it's time to calm down and get back in the game. I'm here to call the bottom.

Or, perhaps, the Federal Reserve won't cut interest rates again, consumers will lose what's left of their confidence, we'll tumble into a full-blown recession, and the market will spiral down to levels not seen since the Internet bubble splattered. Or not.

The fact is, no one knows for certain what's going to happen. Not the talking heads. Not the insiders. Even someone as in the loop as Fed Chairman Ben Bernanke can get it fabulously wrong, as when he predicted on May 17, 2007, "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system." Nice call, Ben.

As BusinessWeek reported in its year-end article celebrating the biggest bonehead predictions from the previous year, a Caris & Co. analyst boldly called that "Amazon.com (Nasdaq: AMZN) is a stock that continues to live on borrowed time." Share price in late 2006 when he made the call: $38.50. Share price today: $74. Oops.

Predictions are tough, but we can be pretty confident of two things:

1. Over time, the market's going up. It has for decades. It will for decades more.
2. In the actual days, weeks, months, and even years that make up that time, the gyrations of the market are about as predictable as Britney Spears.

So, should we give up?
While timing the market is folly, there's a way to give yourself great odds at market-beating, portfolio-building, wallet-lining, heir-enriching returns over the long term: Buy great companies at a discount.

The market's been a bit of a tornado recently. It's been indiscriminately touching down and wreaking havoc on all sorts of companies in its path, each weakening industry spilling into others that are related, sometimes tangentially.

Unless you were planning on cashing in your shares this year to retire, that's actually a pretty good thing, because great buying opportunities abound.

Starbucks (Nasdaq: SBUX) shares are priced as though the FDA just released a report that coffee is definitively linked to leprosy. But with its visionary founder back on board, a high unlikelihood that masses of caffeine-addled drinkers are on the verge of breaking their skinny latte addictions, and slowing growth wrought by McDonald's (NYSE: MCD) competition already priced into the shares, this stock is poised to rebound nicely.

Shares of Legg Mason (NYSE: LM) are near the bottom of their 52-week range because, according to Inside Value advisor Philip Durell said, "The market has inordinately discounted the shares on [short-term] concerns. ... This is stupid."

With talent like superstar investor Bill Miller on the roster, Legg will rediscover its investing mojo and assets under management (AUM) will flow back to the company. Shares have dropped more than 20% since Philip recommended it in the December 2006 issue of Inside Value and another 3% since he re-recommended the company two months ago. Just a greater discount for today's buyers.

Termites in Home Depot's lumber?
Two other companies you might have heard of -- Home Depot (NYSE: HD) and Bank of America (NYSE: BAC) -- are off dramatically from where they were about a year ago. Sure, there are some valid reasons for the drops, but are these suddenly companies that belong on the slag heap? Hardly. Home Depot is part of a duopoly that is likely to rebound once housing worries lift and the company's efforts to refocus on the consumer bear fruit, and Bank of America remains among the world's premier banking franchises. To paraphrase California's acting governor, they'll be back.

In the short term, no one can say what's going to happen to these companies that have drifted to the depths of their share-price ranges.

But as value investors know -- and never shut up about, frankly -- the best time to buy is often when the rest of the market wants nothing to do with it.

That's the Inside Value philosophy, and it's an approach that will reward investors over the long haul. If you'd like to see all the beaten-down companies that Philip and his team are confident will make you rich down the road -- whether we're at the bottom or not -- we offer a free 30-day trial, with no obligations to subscribe.

Roger Friedman is managing editor at The Motley Fool and owns shares of Home Depot and Starbucks. Home Depot and Legg Mason are Inside Value recommendations. Starbucks and Amazon.com are Stock Advisor recommendations. Bank of America is an Income Investor selection. The Fool has a disclosure policy.