How Bad Will It Get?

It's grim out there. The market is down 30% since the beginning of September. The financial contagion that started with the U.S. subprime mortgage defaults has spread to Europe and Asia. Fully 60% of Americans in a recent survey believed that a depression -- replete with 25% unemployment and widespread homelessness and hunger -- is "likely." And just 9% of Americans, an all-time low, were satisfied with the way things are going in the country.

It's gotten so bad, in fact, that the Booyah Bull himself, Jim Cramer, told investors recently to pull any money they need for the next five years out of the market.

Now, that's not necessarily bad advice
Of course, you should never be investing the hard-earned dollars that you need to pay your bills over the next few years. But if you heed the wisdom of the late Sir John Templeton -- whom we recently eulogized as the world's most important investor -- you should always be ready, willing, and able to invest some of your long-term savings in common stocks at -- and this is crucial -- the point of maximum pessimism.

What can happen when you buy at the point of maximum pessimism? Well, as Sir John proved when he famously purchased 100 shares of 104 companies trading for $1 per share or less in 1939, as the market panicked at the outset of World War II, you can make a lot of money.

The good news for you today is that given that data presented above, we're getting pretty darn close to that point -- only 9% of Americans are left to be convinced.

An important caveat
This, however, does not mean that the market has bottomed. It could well get worse before it gets better, particularly since the credit markets remain frozen, and home prices look like they have a bit more "rationalizing" to do.

But some stellar businesses are already selling at hefty discounts to the norm:

Data from Morningstar.com.

Are you brave enough to start today?
Rather than try to time the market and catch these names on the way back up, start dollar-cost averaging into an array of superior names now (remember, Sir John purchased shares in 104 companies) with a commitment to holding shares for the next five years or more. That's the only time-tested way to turn current market volatility to your advantage, and the rewards will be great for those with the courage and resources to do so.

The key, though (and this bears repeating), is to average in -- keeping some money on the sidelines if the market continues to drop -- and adding new money, even in small amounts, on a regular basis. That's a particularly prudent tack today, given the low costs of trading and the violent unpredictability of today's stock market.

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This article was first published Oct. 9, 2008. It has been updated.

Tim Hanson owns no shares of any company mentioned ... yet. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Stryker. The Motley Fool's disclosure policy is a good one, gosh darn it.