Is This the Bottom? Who Cares?!

With stocks down sharply from their bull market peaks, Forbes compiled a group of four prominent analysts and asked them to share their viewpoints on whether the markets had truly reached bottom. Here's what those experts had to say:

"Stocks are down, expectations are down, valuations are down, fear is up and the money supply growth has already started to take off along with the Fed cuts. Those are all positives for the market. The significant volume of selling, or panic selling, over the last few months is commensurate with a bottom."
-- Stuart T. Freeman, A.G. Edwards

"We're in a transitional area, but the trend looks like we're at or near the bottom. We're probably going to move up from here, but the question is how quickly."
-- Holly Gustafson, Legg Mason

"We should see a sustainable upturn from here."
-- Joseph Kalinowski, Thomson Financial/IBES

Will the experts' predictions prove correct? I wouldn't bet on it.

The power of hindsight
You see, those quotes were taken from early May. May 2001, that is.

After an extended bull rally, the S&P 500 dropped sharply in late 2000, characterized by sudden price swings and sharp volatility. In the spring of 2001, the market temporarily rebounded, and Forbes' experts all agreed: This was the bottom.

They were wrong.

Over the next four months, the S&P 500 fell 24%. It rebounded briefly, then dropped another 30%.

They weren't just wrong -- they were spectacularly wrong.

The moral of the story
The point of citing a 7-year-old Forbes article isn't to poke fun at the experts' predictions. After all, many investors in May 2001 (including yours truly) believed that stocks were ready to rebound. Instead, my point is that predicting which way the market is headed next is nearly impossible -- and likely immaterial to your investment returns.

If you concentrate on buying quality companies at a discount to intrinsic value, odds are you'll make money in markets up, down, and anywhere in between. Consider the performance of the following seven stocks -- purchased at what we now know was a terrible time to buy equities:

Company

Share Price, May 7, 2001

Share Price, Sept. 19, 2008

Return

Chesapeake Energy (NYSE: CHK  )

$7.89

$41.73

429%

Freeport-McMoRan (NYSE: FCX  )

$11.51

$73.52

539%

MGM Mirage (NYSE: MGM  )

$14.98

$34.98

134%

Nordstrom (NYSE: JWN  )

$8.19

$33.93

314%

Nucor (NYSE: NUE  )

$10.82

$51.16

373%

Research In Motion (Nasdaq: RIMM  )

$5.68

$103.44

1,721%

Valero (NYSE: VLO  )

$10.00

$34.18

242%

* Share prices adjusted for dividends and splits.
Data from Yahoo! Finance

Though I've picked these companies to illustrate my point, they're hardly the lone examples, and, at the time, they shared a few key traits. They all looked cheap when the Forbes article was published. They all got cheaper after the article was published. And they've all provided substantial returns for patient, long-term investors.

How to find the next Apple
OK, nobody saw Apple as a potential 11-bagger back in 2001. But the company did have a number of characteristics in its corner that made it a compelling value purchase. Apple had a passionate and dedicated founder/CEO and a loyal consumer base. It had several promising new products on the horizon (including a small MP3 player you may have heard of), and nearly $6 per share sitting in cash on its balance sheet.

Or consider McDonald's, which was plagued by sluggish sales growth and declining margins at the turn of the 21st century. Investors focused on the company's short-term struggles, and overlooked its beloved brand name and proposed operational improvements. At one point, McDonald's traded for less than the land on its balance sheet.

Focus on fundamentals
The ability to ignore short-term market sentiment and focus on a company's underlying fundamentals is what separates investors from speculators. It's also what propels long-term market-beating returns.

When you buy quality companies that, like Apple and McDonald's circa 2001, trade at a discount to intrinsic value, you don't have to worry about timing the market or buying at the bottom. All you have to do is sit back, relax, and wait for Wall Street to award your stocks a more reasonable valuation.

Thanks to the recent market volatility, there are a number of compelling, cheap opportunities out there. So don't try to predict where the market is headed next; spend your time searching for quality companies trading at a discount to intrinsic value. That's how our team at Motley Fool Inside Value invests. Our team believes we have a number of excellent businesses trading at cheap prices. If you need a few stock ideas, you can see all their recommendations and their best bets for new money now by clicking here for a 30-day free trial.

This article was first published May 30, 2008. It has been updated.

On second thought, Rich Greifner would like to bet on the experts' predictions. Rich does not own shares in any company mentioned in this article. Chesapeake Energy is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.


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  • Report this Comment On September 22, 2008, at 7:08 PM, oneeighthundred wrote:

    I think Apple's getting a bit too much credit. Their "loyal customer base" was microscopic at that point, and certainly wasn't what exploded the iPod's popularity, and the iPod hardly looked like the formula for a successful product at release, since the iTunes music store wasn't even around at that point.

  • Report this Comment On September 22, 2008, at 9:07 PM, SteveTheInvestor wrote:

    1-800:

    I agree with your point about Apple. At the time there was no reason to think that Apple would be a stellar growth stock. The article however, is written using hindsight which is always 20/20. Buying Apple at that point in the cycle would have been about being lucky.

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