Have you seen this guy Buck? You know the type. He's constantly shuffling past, waving his Berkshire Hathaway prospectuses and mumbling something about market multiples this...gross domestic product that... and how darned difficult it is to find a bargain these days.
Panic, hang the DJ
I hate that guy Buck. If there's one guy I don't want to see coming round the corner, it's Rex Moore, who got me on the hook for this column. But after that, it's "Valuation Buck." Then comes just about anybody who insists we are in a "short-term cyclical bull within a long-term secular bear." Spare me.
Assuming there is something to this brand of macro-market characterization, much less prediction, I don't want to hear it. Especially not now -- not when I am saving for my retirement and have to be invested. Aside from their professors' long-term unaccountability, here's the problem with such dire predictions: They say nothing to me about my life.
Timing isn't everything
One of the benefits of my job is that I hear from readers from all over the country. My favorites are the young investors. You'd be surprised how many write in saying that they are about to graduate college, or are in their teens, and just getting started as stock investors. What won't surprise you is what they want to know.
"Isn't this a bad time to be buying stocks?" That's always a tough one, but especially so when the market looks so treacherous. It doesn't help to know you are talking to someone who doesn't have a whole lot of assets lying around. It sure doesn't help that ole Buck is ambling to and fro grumbling, "It's a long way down; we have a long ways to go."
But these are days you have to be strong. When you must remember all the airtight arguments -- both bull and bear -- you have heard over the years and that have turned out to be groundless. These are days to remember that there is only one proven method of timing the market: getting started as early as possible.
What kind of investor are you?
It's funny. If you ask me, I'll say I am a small-cap investor. In fact, I have more money in large-cap growth stocks -- through Spiders and index funds -- than anywhere else. Given their weighting in the S&P 500, it's entirely plausible that AIG
My trading -- er, I mean, brokerage -- account, however, is peppered with orphans I picked up over the years, either early on in their growth phases or as turnarounds after punishing selloffs. My fortunes might ride on General Electric
I'm a small-cap, aggressive growth investor. What kind of investor are you? If you're not sure, this is a perfect time to find out. After all, everybody is comfortable with upside risk. We are all risk-tolerant when things are going well. The best time to look in the mirror, however, is when the wind is blowing -- hard.
Why I am staying small
In "Wall Street's Worst-Kept Secret," I make the case that over the long, long term the stocks of smaller companies outperform. I back that up with support from Ibbotson Associates, though not everyone agrees with me. Just about everybody does agree, however, that smaller companies offer advantages larger outfits simply cannot.
For one, they are run by committed, charismatic leaders (often founding entrepreneurs) with a lot of skin in the game. For another, they are more nimble, innovative, and much less bureaucratic. These are precisely the traits that propelled featherweights such as Dell Computer
But you had better expect some volatility, especially when you swing for the fences. Holding these stocks can be downright harrowing. That's why it's so important you understand yourself as an investor in the good times. Being sucked in by the bear crowd -- and baited into radically changing course midstream -- can be a very costly mistake.
You can beat the big, bad bear
There is another reason not to fret over Buck and the long-term secular bear crowd. It's true: Overall, stocks do tend to move together, and stock investors do to some extent share one fate. But this is not always so. Just as there are invariably big winners on bad days, there are stocks that do well in "ugly" markets.
I owned mighty Pulte Homes
There is an even more primary reason to ignore the monster screamers. An old joke among economists goes something like, "We have correctly predicted nine of the last five recessions." Ha. Good work if you can get it. However, if you're thinking of buying stock but are putting off getting started, keep thinking. Time in the market really matters, and these dopes are probably wrong.
How about a compromise?
For those of you looking to get started with small caps but worried about this market, there is one other solution: You can combine your search for growth -- dare I say home-run -- potential of great small companies with a fundamental valuation approach. Fortunately, this need not involve a pocket protector or a discounted-cash-flow calculator.
The easiest place to start is to insist on real earnings. After all, small caps are invariably whipsawed by investor sentiment and by large swings in earnings and revenues associated with market cycles. But those that suffer most are those that have little by way of current earnings, cash flow, and assets to support their market price.
Has a lot of money been made buying companies in the midst of a turnaround or even before they turn a profit? Yes, but this is tricky business. Today, we're talking compromise, and small-cap stocks that trade at modest multiples offer the best of both words -- upside potential and relative safety.
What to do next?
I learned this both the hard way and the easy way. The easy way was working with Tom Gardner on his Motley Fool Hidden Gems newsletter. For all its association with home-run stocks and finding the next Wal-Mart, Hidden Gems investing is at heart a value approach.
Very likely, that is why Tom's portfolio hasn't gotten clunked as hard as my small-cap exchange-traded funds (ETFs) these past few weeks -- or nearly as hard as my individual small-cap portfolio. As of April 21, Hidden Gems recommendations are up on average 28% versus just 5.1% for the S&P 500 over the same period.
None of us, sadly, has done quite as well as Valuation Buck these past few weeks (though yesterday's 2% pop sure helped). Then again, I think in terms of years, not weeks. The way I see it, we have time and history on our side. So take your time. Pick your spots. But please don't hunker down and wait out this long-term secular bear -- whatever that is.
If small-cap value investing sounds like the thing for you, Tom Gardner is offering a special 30-day free trial to Hidden Gems. If you'd like to take him up on it,start here.
Fool writer Paul Elliott owns none of the stocks mentioned. The Motley Fool has a full disclosure policy.
