Grab This Bull by the Horns

As you've probably heard by now, we're officially in a recession. The National Bureau of Economic Research, the official conservator of the "recession" brand and trademarks, has bestowed that illustrious title on our current economy, retroactive to December 2007.

I'm sure this was as much a surprise for you as it was for me -- specifically, not much of one.

Breathless CNBC punditry aside, the existence of a recession has been obvious to most of us for months now. Layoffs, stock market decline, declining growth rates, plummeting real estate prices, more stock market decline, bank failures, still more stock market decline... if that doesn't spell "recession," I don't know what does.

But here's what I do know: Even though the market plummeted after the announcement, the official declaration is good news.

Why? Believe it or not, it's a bullish signal.

Wait. What?
Recessions are never officially recognized right away. Sometimes they're only recognized in retrospect. Other times, like this one, the official word is only passed down long after it has become obvious to everyone.

So why is that significant? Historically speaking, bear markets end before recessions do.

Fidelity Investments recently published an interesting set of data from the last 14 recessions, from 1926 through the recession that began in 2001. According to Fidelity, if you take the median values for these 14 recessions, you learn that the typical recession lasted 11 months -- and that the market started climbing after six months. More often than not, the market rose 25% or more from the low point to the end of the recession.

How could this be? Remember that the market is forward-looking. It represents the discounted value of everyone's best guess about what's going to happen in the future. You don't buy a stock because of what the company is doing today -- you buy it because of what you expect from the company in the future.

If history is any guide, the market will start to rise as more and more investors think they see the light at the end of the tunnel. By the time we actually get out of the tunnel, the new bull market will be well under way.

Meanwhile, it could still go lower. And history is not always an infallible guide -- this recession, and this bear market, could go on for quite a while yet.

How can we buy stock while protecting ourselves? By buying value.

Your margin of safety
Value investing is the art of seeking stocks with very little downside. In a nutshell, one looks for companies that are generating a high (and sustainable) return on their invested capital, have low levels of debt, and are selling for a low price relative to their earnings.

Ideally, that price is low enough that the shares are selling for less than their intrinsic value. If so, we say that the shares have a "margin of safety." And if all the other factors look good, we buy like crazy.

Now, valuations have been quite high in recent years, and finding stocks with a true margin of safety has been a challenge. But ever since Mr. Market went off his meds last year, those valuations have been coming down. It's easier than it has been in a while to turn up intriguing value candidates. I just did a couple of screens and came up with these:

Source: Motley Fool CAPS. Data as of Dec. 4.

Now, not all of these are necessarily good buys -- for instance, Garmin may face rougher times ahead, as GPS becomes an increasingly common feature on smartphones. Do some research before you make any trades.

And while you do, ponder this question: Are values low enough yet? How many real margins of safety are out there?

Is it really time yet?
It's hard to say -- as I said, the market could go lower, things could stagnate ... all kinds of outcomes are possible. But something in the new issue of the Fool's Rule Your Retirement newsletter caught my eye: Some of the stingiest value investors out there are starting to buy.

As Rule Your Retirement lead advisor Robert Brokamp notes in this month's Model Portfolio Review, several prominent value-fund managers have recently said that they're finding what one referred to as "an incredible number of investment opportunities" right now. Of course, as we've seen, there are still reasons to be cautious -- and Brokamp looks at those as well.

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