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My Great Investing Dilemma

By Bruce Jackson - Updated Nov 11, 2016 at 6:49PM

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How to proceed in these uncertain times.

The U.S. economy is in big trouble. The specter of stagflation (a mix of stagnation and inflation) looms, higher prices for energy and food fuel inflation, and a collapsing housing market intensify fears of recession.

What happens if the Federal Reserve cuts interest rates to 1%, as some people suggest, and the economy still goes nowhere? Could the U.S. be the next Japan, where 19 years after the Nikkei 225 index peaked at 39,000, it now trades around 13,000?

If so, what then?
A bear market is one thing, but this far-reaching economic uncertainty creates an investing dilemma. Given these conditions, do we:

  1. Do nothing, wait out the storm, and watch the market fall?
  2. Sell some of our weaker stocks, avoid further losses and yield more cash to buy when the market really bottoms?
  3. Buy more of our favorite stocks while they're undervalued?
  4. Avoid looking at anything to do with the stock market?

The best investors are distinguished from their average peers by their ability to calmly and rationally assess a situation, concentrate on the underlying value of a company instead of its share price, and take advantage of falling prices to buy more of the best operators. Setbacks, corrections, and pauses are all part and parcel of a long-term investing strategy, and if we focus on the big picture, we should be well rewarded.

Still, despite knowing all of these things, I personally remain on the horns of a dilemma.

Stocks are not cheap
On one hand, I'm reluctant to be fully invested because I can't help but think that this market will fall further. In an interview with CNBC at the beginning of March, Berkshire Hathaway (NYSE: BRK-A) Chairman Warren Buffett said, "Stocks are not cheap." Who am I to argue with the greatest investor of all time?

On the other hand, I am mindful of the advice of Motley Fool co-founder Tom Gardner and other great investors, that the time to buy is now and always now. In its most recent quarterly investment letter, Canadian-based Trapeze Asset Management, a small money manager with a strong value investment philosophy and an excellent track record, said, "The market is cheap and, odds are, has bottomed."

What's an ordinary investor to make of all this? Should we be fully invested in this market or not?

Good question
They say the stock market climbs a wall of worry, and these are indeed uncertain and worrying times for the U.S. economy. But there's always something to worry about, something that could stop you from buying stocks in good times and bad.

As a result, I recommend that we all:

  • Read as much as we can about the current economic environment so we can make informed and rational investing decisions.
  • Track the choices the best investors are making now.
  • Sell some of our weaker stocks to raise cash.
  • Reinvest some of that cash back into top companies that have been battered unfairly by this savage bear market.
  • Keep some of that cash available, in case we get buying opportunities in some very high-quality stocks. Google (Nasdaq: GOOG) and Adobe (Nasdaq: ADBE) are two of my current candidates.

Other stocks are cheap now
I don't know whether the market has bottomed, or whether stocks as a whole are cheap. But I do know that some companies appear undervalued now. Trapeze, for example, mentions Office Depot (NYSE: ODP) and Walgreen (NYSE: WAG).

The Motley Fool's own Bill Barker thinks Harley-Davidson (NYSE: HOG) is cheap -- you can buy it for less than 10 times earnings right now, a remarkable price given its financial stability and international sales.

Fellow Fool Tim Hanson thinks Starbucks (Nasdaq: SBUX) is an ideal company to buy and hold for the next three to five years. Starbucks has a strong balance sheet, a durable brand, reinvigorated management under Howard Schultz, and the opportunity to improve operations here in the U.S. while expanding operations abroad.

Dilemma solved: I'm buying now
None of us will ever be able to pinpoint the bottom of the market. Forget about it. Whatever direction the economy goes, plenty of cheap stocks are out there now, and now is the time to buy them.

The companies mentioned above are not only cheap, they're high quality. The Fool's Inside Value team specializes in searching for quality companies on sale. In fact, they've found a number of stocks that they believe to be trading at significant discounts to fair value.

These stocks won't make you rich quickly, but they offer compelling value over the long term. To take a look at the stocks they recommend now at Inside Value, take a free 30-day trial. There is no obligation to subscribe.

Fool contributor Bruce Jackson owns Berkshire Hathaway B shares. The Motley Fool owns shares of Starbucks and Berkshire Hathaway. Berkshire Hathaway and Starbucks are recommended in both Motley Fool Inside Value and Motley Fool Stock Advisor. The Motley Fool's disclosure policy poses no dilemma.

None

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$439,499.71 (-0.01%) $-29.21
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$117.07 (-0.34%) $0.40
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$85.65 (-0.09%) $0.08
The ODP Corporation Stock Quote
The ODP Corporation
ODP
$37.47 (0.92%) $0.34
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
WBA
$39.47 (1.22%) $0.47
Adobe Inc. Stock Quote
Adobe Inc.
ADBE
$432.53 (-0.21%) $0.90
Harley-Davidson, Inc. Stock Quote
Harley-Davidson, Inc.
HOG
$38.13 (2.31%) $0.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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