When the Economy Hits Home

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At some point in the past 10 years, lots of people in my part of town went from driving Hondas and Fords to driving brand-new BMWs and Porsches.

I like cars, and I pay attention to them. I always wondered how all these folks managed to make enough money to properly afford $60,000 cars. I didn't get to know many of them very well, but the ones I did meet at soccer practice or Little League games seemed to have the kinds of jobs that paid about what I was used to making, or what my wife makes: a solid professional income -- comfortable, but not wealthy.

Even though my family has always tended to live below its means, I knew there was no way I'd be comfortable buying a $60,000 car, not even if we threw caution to the wind and splurged. And when you factor in that some of these folks paid considerably more for their houses than we had -- housing prices started rising sharply in our area about 15 minutes after we closed on our house in 1998 -- I eventually started to wonder how they were doing it.

Now, I'm starting to figure it out.

The secret was in-house
We're building a new home, in a community with some friends. We've been working on it for a long time, and we've known for a couple of years that our current house would go on the market this past April. And so it did.

Boy, did that turn out to be lousy timing. Within a few weeks of our house hitting the market, five or six other houses in our neighborhood had "FOR SALE" signs out front. We'd never seen anything like it -- very few houses in our area had turned over in the 10 years we'd been there.

To be fair, I don't know any of those folks, and I don't know why they all put their houses on the market last spring. But I keep reading stories about people who funded above-their-means lifestyles with home equity, only to get burned when the prices started to fall. I'm starting to see a picture emerging, and it's not a pretty one.

By the way, six months later, only one of the houses in the neighborhood has sold -- and it wasn't my beautifully maintained, lushly landscaped, bargain-priced specimen.

I'm not happy about this. I'm losing more on-paper home equity every month, though I'm still a long, long way from being underwater.

But I'm not going to moralize about how we're all paying the price for Americans' credit-happy ways in recent years. Instead, I'm going to try to figure out how to make money out of this mess. We live in fearful times. Let's think about being greedy instead.

What to buy right now
The list of stocks we don't want to consider right now is long, and much of it is pretty obvious. With maybe a few exceptions, we should stay away from banks. We should probably think twice about mass-market-luxury brands like BMW, Coach (NYSE: COH), and Polo Ralph Lauren (NYSE: RL), which will be the first to suffer as consumers find themselves with less credit. We should stay away from anything trendy or frivolous.

But where should we go? Some spots are obvious: Mass-market giants like Wal-Mart (NYSE: WMT), McDonald's (NYSE: MCD), and Costco (Nasdaq: COST) are worth a close look, for example, and if anyone can make money out of this mess, Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) probably can.

But while we can identify companies that seem like they'll do OK in a recession, identifying true values right now is more complicated, and far more desirable. A genuine value stock has a margin of safety, meaning that it's priced below its intrinsic value. This minimizes the downside risk and makes the company a great investment -- provided that you can determine its intrinsic value with confidence.

That's a tricky proposition in a declining economy. May I suggest some expert help?

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