To make gobs of money as an investor, you need to be forward-looking and focused on the long term.
Not many folks will disagree with that. But there's a battle we investors face every day. It is, simply, remaining forward-looking and focused on the long term in an age of information overload.
Yes, overload
Consider a sampling of three recent Associated Press headlines:
- "Cogent Sees Narrowed 1Q Loss"
- "Chinese Shares Rise 0.6 Percent"
- "Stocks Pause on Subprime News"
What do these headlines have in common? They're backward-looking and focused on the short term.
This isn't to pick on the AP
AP writers and editors do their job well. It's just that their job is to cater to a news-obsessed and short-term-focused readership.
These folks want the news, they want it now, and they want to trade on it fast. And rest assured, they can trade on it faster than you.
Stocks up on buying!
On a day-to-day basis, there's only one type of news you should pay attention to: the type that presents you with a buying opportunity. Allow us to quote Warren Buffett on the subject:
"The most common cause of low prices is pessimism -- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer."
Fortunately, rational buyers don't have a lot of enemies these days. Check out these AP headlines from Feb. 27:
- "Small Caps Get Hit Hard in Downturn"
- "Automakers Skid as Dow Tumbles"
- "Grains Decline, Soybeans Down"
When even soybeans are down, savvy investors should take notice.
The scariest stocks on the market
See, as George Gilder wrote in "The Outsider Trading Scandal," despite all the news and technology at our fingertips, our "markets still behave like tulip auctions in 1690."
That means they're overbought when they're up and oversold when they're down. Just think about homebuilders today. Pulte (NYSE:PHM), Hovnanian (NYSE:HOV), Toll Brothers (NYSE:TOL), and Centex (NYSE:CTX) are well off their highs, and investor pessimism surrounding the weakening housing market has pushed them further down in the past few days.
Profit from pessimism
These are the situations that savvy investors should be investigating. We say "investigating" because things could go awry thanks to moving parts and unknown variables such as writedowns of asset value. Yet whenever there is this much pessimism surrounding an industry, chances are something is oversold.
Remember: It was investigative skills and the courage to buy in crisis that helped Johnson & Johnson (NYSE:JNJ) buyers earn huge gains when the Tylenol scare hit in the 1980s or when the Propulsid troubles hit in 2000. The same skill-set would have helped you triple your money had you bought Hewlett-Packard (NYSE:HPQ) while the company was downsizing in 2001.
You can profit by buying when stocks are oversold -- as long as you stay on the lookout for the right opportunities. If you want to see the opportunities we've dug up, click here to join Motley Fool Inside Value free for 30 days. Because when stocks fall, we're ready to back up the truck.
Tim Hanson and Brian Richards do not sell or smoke crack, contrary to the assertions of a reader email this week. They do not own shares of any company mentioned. J&J is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.
