"What makes the Hottentot so hot? What puts the 'ape' in apricot? What have they got that I ain't got?" -- The Cowardly Lion in The Wizard of Oz
These are scary times for investors. But these are also the times that separate the brave from the fearful, the heroes from the hysterics, the men from the boys ... you get the picture.
It's far too easy to succumb to crises of confidence and simply hide one's head in the metaphorical sand (or worse, sell quality stocks because of fear -- after all, it may look like a logical time to cut one's losses). It's also hard to work up the courage to buy beaten-down stocks when investing may feel like an accident waiting to happen.
That's why we can't forget that these bearish, volatile times create golden opportunities to build stellar portfolios.
Time will tell
Recently cited in a Washington Post article, Morningstar analyst Bill Bergman provided some compelling information about diving in when things look dire. He calculated how much an investor would have made by putting just $1 a year in the S&P 500 index every month since 1950: A total $703 investment would be worth $9,300 today.
Even more interesting, though, was when Bergman broke the $703 into nine equal parts and calculated returns if those amounts were invested in the first month of the last nine recessions. Those investors would have done better by 24%, with $11,600.
Of course, hindsight is 20/20, and we don't know "the first month of a recession" until after it's happened -- although the data also underlines the strength of long-term investing in general. Regardless, in the current downturn, many high-quality stocks have gotten whacked well beyond reason.
The best investors -- Warren Buffett, George Soros, Bill Miller, and Peter Lynch, for instance -- are brave and rational in times like these, but you don't have to be a famous money manager to buy when there's blood in the streets. Like the Cowardly Lion I quoted above, we've all got it in us, no wizardry needed.
From genius to goofball
The psychology is against you, of course. Bull markets and rising stock prices make everybody feel like geniuses as paper gains mounted, and I might not be the first one to imply that in hindsight some of the big winners looked pretty silly -- Crocs
Bear markets, on the other hand, can make many people feel like dummies who wish they'd never even heard the words "stock" or "invest." Even well-run, quality companies take drubbings far beyond reason when so many people are afraid. It's not exactly good for self esteem, and certainly doesn't do much to drum up the courage to invest.
However, if you can't turn that psychology on its head and remember how irrational the market can be on both the upside and the downside, you will probably miss some truly great opportunities that are presenting themselves during the market's recent bearish lows.
Don't be scared, but don't choose stinkers, either
Of course, making the prevailing negativity work for you over the long haul requires searching for quality companies with stocks that have been unfairly pummeled, or that still have a solid long-term prognosis despite short-term obstacles.
For example, financial stocks like Lehman Brothers
As for a solid long-term prognosis despite short-term obstacles, well gosh, count out General Motors
When the going gets tough, the courageous go shopping
The brave investors look for stocks where the pessimism seems somehow out of whack, and there are plenty of possibilities to go around these days. Here are a couple stocks I've noticed that might not deserve their recent haircuts.
Likewise, what about NVIDIA
To take advantage of high-quality companies that have been unfairly pummeled right now, look for those that have solid long-term prognoses. Starbucks and NVIDIA are two worth researching further.
They're both picks of our Motley Fool Stock Advisor, too. At Stock Advisor, Fool co-founders David and Tom Gardner encourage members to be courageous in crazy markets like these. That means being disciplined, rational, and patient, and adding new money to the market on a regular basis. Since inception in 2002, their recommendations are beating the market by more than 40 percentage points.
If you'd like to find out David and Tom's 10 favorite stocks right now, click here for a free 30-day trial.
These times are definitely a call for the courageous, but we've all got it in us.
Alyce Lomax owns shares of Starbucks, but none of any of the other companies mentioned. Starbucks and NVIDIA are Motley Fool Stock Advisor recommendations; Starbucks is also an Inside Value recommendation. Crocs is a Hidden Gems Pay Dirt pick. The Motley Fool owns shares of Starbucks. The Fool has a disclosure policy.