Don't Get Eaten by This Market

When the market bottomed out in March, what did you do?

Did you treat it like a fire sale and buy everything you could? Or did you join the wave upon wave of panic selling?

If you were aggressively buying as the rest of the world was panicking, congratulations. You can count yourself among the fiercest sharks on Wall Street. If, on the other hand, you cashed out near what turned out to be the bottom, well, consider yourself chum.

How about neither
While no one wants to be the one eaten (much less admit to selling at the bottom), being a shark, especially during times of market volatility, isn't as easy -- or as profitable -- as you might think. For one thing, you need nerves of steel and an absolute conviction that things will work out, despite the rest of the market panicking around you.

For another, you need a significant bankroll. In this recent market meltdown, that was far easier said than done. After all, not only was the stock market tanking, but the debt market was collapsing right along with it. As the debt market evaporated, so did the most aggressive investors' primary source of funding. In other words, even if you had had the clairvoyance and internal fortitude to buy during the market's panic, you likely would have lacked the capital to truly strike it rich.

And finally, have you seen the junk that's led the rally? AIG, for instance, still a money-losing ward of the state, is up around 373% from its recent low point. Even if you had both the capital and the nerves to aggressively invest, would you really want to tie yourself to that company? I don't.

In fact, between the capital crunch at the market's bottom, the junk that led the rebound rally, and the insane volatility, I'd be surprised if more than a few lucky souls truly did well by buying aggressively.

Doing it differently
But there are investors who neither panicked and sold nor tried to time the market and figure out which stocks would rally the highest. Who were these lucky people? Investors who bought the stocks of great companies for a price somewhere below what they calculated was the fair value of the company.

Sure, they suffered during the market's tremendous drop, like everyone else did, but because they based their investing on underlying businesses, the simple fact of stock market volatility -- even really dramatic stock market volatility -- didn't necessarily change their thesis.

After all, would you feel the need to sell the stocks you owned based only on a tanking market price if the companies behind those stocks had:

• Solid balance sheets,
• Decent cash flows,
• Products that were still in demand even as the economy tanked, and
• Significant moats against competition?

If anything, you would have been in a much better position to both hold onto what you already had and to invest your dividends and new capital back into buying even more shares -- thus capitalizing on the volatility.

Panic-free investing
While the market is less volatile than it was, the short term is still unpredictable -- as it always is. Rather than trying to aggressively time buys and sells to top the market,  it's always better to buy excellent companies for great prices and hold on regardless of what the market does in the short term.

Take a look at these companies, for instance:

Data from Capital IQ, a division of Standard and Poor's, as of Dec. 2.

With more cash and equivalents than debt, they're not at risk of being forced into bankruptcy simply because of maturing debts. Likewise, with positive earnings backed by significant cash flows, they're clearly generating the cold, hard cash necessary to sustain themselves through a rough economy. Perhaps best of all, with their shares fetching around 15 times next year's expected earnings (or less), their prices appear to be reasonable.

The right mind-set for success
At Motley Fool Inside Value, we're constantly on the lookout for strong companies with solid balance sheets that trade at reasonable prices. Our focus on the companies behind the stocks helped us and our members hold onto those same solid businesses through the panic and crash. And holding on enabled us to reap the rewards of being invested as the market recovered.

If you're ready to swim loops around those sharks by buying parts of solid businesses at reasonable prices, join us today. Your 30-day free trial starts here, and there's no obligation.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Intel, which is a Motley Fool Inside Value pick. eBay is a Stock Advisor selection. Motley Fool Options has recommended buying calls on Intel and a bull call spread on eBay. The Fool has a disclosure policy.