Fear Can Be Your Friend

These are frightening times.

The Dow Jones Industrial Average recently made official what has seemed inevitable for a while -- we're in "bear market" territory now that the Dow is off more than 20% from its most recent highs.

Inflation is hurting. Gas has climbed ever higher. Credit is harder to come by. Uncertainty abounds, for both consumers and investors.

But here's why I'm allowing fear to be my friend: Some of the greatest investors in history have proven that scary times set the stage for the best price opportunities for long-term investors. A sampling:

• "Buy when the blood is running in the streets." (Baron Rothschild)
• "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." (Warren Buffett)
• "Mr. Market needs some serious mood-stabilizing medications most of the time." (Benjamin Graham -- but OK, I took some serious artistic license with that one)

They're running
The fear factor has hit stocks far and wide. From high-end consumer goods to technology, from financial services firms to toy makers, there's a lot of pain out there -- and investors have responded by taking their money out of equity funds, which are down more than $15 billion since the beginning of the year.

But now is no time to stuff your mattresses with cash instead of stuffing that cash into stocks.

Here are just a few examples of stocks that have gotten stomped recently:

 *Data from Motley Fool CAPS and Yahoo! Finance as of July 10, 2008.

You're shopping
When it comes to those stocks, clearly, blood is running in the streets these days.

Of course, no great long-term investor would buy beaten-down stocks indiscriminately. When it comes to stocks, discriminating is always a smart thing to do. Although many stocks look incredibly cheap, there are many I'm just not interested in.

By way of an example, General Motors (NYSE:GM) recently hit a low unseen since the mid-1950s. Still, given its reliance on trucks and SUVs and rumored liquidity concerns, not to mention my own lack of confidence that it can innovate, there aren't enough airbags to make that a safe vehicle for my money.

And financials, where blood has been in the streets since last year? Thanks, but no thanks. Given the current credit crisis and my suspicion that there's a lot left to shake out for the financial firms, right now I wouldn't touch a stock like Citigroup (NYSE:C) with a 10-foot pole.

Instead, I'm looking around for innovative companies that have been beaten down and have little or no debt. From the table above, Coach looks like an incredible bargain to me. It's not often that you'll find a high-quality brand like Coach trading at just 15 times earnings with a PEG ratio under 1.0, but that's the nature of the current economic beast.

As investing guru Mason Hawkins of Longleaf Partners recently wrote to shareholders:

Successful investors must endure the short-term vagaries of market declines to be positioned well for the long term and to minimize transactional costs and taxes where relevant. Really good investors also arm themselves with conservative appraisals and use periods of weakness to buy more of their qualifiers when discounts to appraisal increase, i.e., when the margin of safety of value over price widens.

Do you want to be a "really good investor"? Then take a page from the pros and let fear present you with a good opportunity to buy shares of great companies -- for a bargain.

Their fear = your BFF
OK, so maybe fear in general isn't your "BFF" (best friend forever!), but when fear drops the stock prices on great companies, you've got a golden opportunity to buy. Just take it from Buffett, Rothschild, Hawkins, et al.

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Alyce Lomax does not own shares of any of the companies mentioned. Coach is a Stock Advisor recommendation. The Fool's disclosure policy doesn't fear the reaper.