This is the perfect market for cheapskates.
I don't mean that derisively. When a stock's price has hit the skids, after all, smart shoppers can snap up bargains -- and these days, there appear to be plenty of 'em. Bank of America (NYSE: BAC), Nokia (NYSE: NOK), and eBay (Nasdaq: EBAY), for example, all currently clock in with prices more than 30% below their respective five-year highs.
Nike (NYSE: NKE), Wells Fargo (NYSE: WFC), and Procter & Gamble (NYSE: PG), meanwhile, trade with price-to-earnings ratios (P/Es) below that of the broader market. And while Monsanto (NYSE: MON) is running with a P/E higher than the market's, this multiple is still much lower than its five-year average.
Very tricky
They may be cheap, but are they good buys? With individual stocks, the tricky part is determining whether a company's stock price has nose-dived for reasons that aren't related to fundamentals -- like general market volatility -- or whether it's cheap for a good reason. Maybe an important product launch has flopped, say, or the company has seen a steady erosion of its market share.
Dwindling levels of free cash flow (FCF) should cause you to raise an eyebrow -- probably two -- and bring out a shovel. Even if the price seems right, you'll need to dig through such a company's financials to determine if it's a worthy investment.
Spotting the difference between values and value traps can be a full-time job. And while contrarian investing is a smart way to build wealth long-term, in the short term it can be pretty volatile.
Smooth the edges
And that volatility is why mutual funds are a smart bet for contrarian investors. The advantages include:
- Smart diversification -- With well-chosen funds, your nest egg won't crack up when one company -- or even a handful of companies -- hits the skids.
- Convenient asset allocation -- Unlike individual stocks, funds make it easy to round out your portfolio's exposure to areas of the market -- such as international equities, say -- where researching individual companies (and country-specific accounting standards) could be time-consuming.
- Low costs -- Although the typical mutual fund charges too much and underperforms, plenty of cheap and compelling options exist.
The cranky cheapskate
Indeed, while I was advisor of the Fool's Champion Funds service, the average price tag of the funds I recommended to members was roughly 1%. Now I'm setting off to engineer a real-money portfolio designed to protect and grow your money.
Ready-Made Millionaire will feature a smattering of top-notch mutual funds, a select group of stocks, and an ETF or two. To find out more information about this investment service, simply enter your email address in the box below.
