The Best Opportunity This Decade

Over the past 60 years, the United States has seen, and survived, 10 recessions (not counting the one we could be in at present). From the shortest one -- six months in 1980 -- to the two that spanned 1973-1975 and 1981-1982, we've muddled through and come out the other side. In between each, we've experienced, on average, almost five years of expansion.

So while we could be in another recession right now, and we're definitely in a bear market, I'm excited!

Pardon me while I wipe my chin
First, we have a whole bunch of people running around in panic mode crying, "The sky is falling!" They don't want to hold stocks during a recession, so they're willing to sell them -- cheap.

Second, the news media fans the flames of panic with constant stories about weakening consumer spending, failing banks, and the specter of recession.

Third, we've got a handful of really hated companies. Specifically, I'm talking about the banks, thrifts, and builders that caused and are feeling the fallout from the mess we're in.

What does that add up to? Bargains.

Like a kid in a candy store ... and the candy's on sale
Maybe I'll try a financial company, like Goldman Sachs (NYSE: GS). It did a decent job managing its risks among the storm created by CDOs and MBSs, but since the end of August, its price has dropped some 30%. It got painted with the same brush slapping others who were more deeply involved, like Merrill Lynch (NYSE: MER).

There's also Bank of America (NYSE: BAC). It carries less than 1% of non-performing loans on its books and might be worth a nibble.

And if you don't want to invest in a bank, but still want exposure to the financial sector, consider American Express (NYSE: AXP). It's a free cash flow generating machine, having produced over $10 billion of the green stuff during the past four quarters.

Then there are homebuilders. While some might go bankrupt, others will survive. Will it be Pulte Homes that goes under or will it stay afloat? Can it shore up its balance sheet enough to ride through the storm? And what about the suppliers to homebuilders, such as USG (NYSE: USG)? Many of them have seen their stock prices decline, too. The whole sector, while volatile, looks intriguing.

Finally, several retailers have gotten interesting. All the talk about lower consumer spending and recession has driven prices of many down to enticing levels. For instance, there's Home Depot (NYSE: HD) which will still be supplying people with home supplies. We still have to clothe ourselves and our kids at places like American Eagle Outfitters (NYSE: AEO). Both companies have dropped quite a bit recently. For my money, I'm interested in such companies which I can buy today to own in 2013 -- so thanks for the bargains, Mr. Market!

"When Buffett speaks, people listen."
Investing in the above industries might seem counterintuitive now, but Warren Buffett says au contraire.

To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Bill Nygren, another great value investor, agrees. Looking at the economic situation, he wrote, "What usually happens is that suffering industries begin to recover, the next crisis comes from somewhere least expected, and the cycle of creating new investment opportunities starts anew. We have no reason to believe it will be different this time."

These gentlemen know that investing today in areas that aren't well-liked will position your portfolio for the eventual end of this bear market. There will be another bull market. What we have now is the chance to grab some good companies while they're cheap.

So what are you going to do? Stop investing in stocks altogether, worried that things will be different this time? Or listen to master investors (not me -- Buffett and Nygren!) and look at some opportunities?

I know what I'm doing.

Finding value
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This article was first published on Feb. 12, 2008. It has been updated.

Jim Mueller owns shares of American Eagle and USG but no other company mentioned. The Motley Fool owns shares of American Eagle and American Express. American Express, Home Depot, and USG and Inside Value recommendations. Bank of America is an Income Investor selection. American Eagle and Berkshire were selected by Stock Advisor. The Fool has a disclosure policy that believes, deep down, that the market will turn around.