It's Not Different This Time

Most of us have seen our portfolios fall. Many Fools are even writing that they're pulling everything out of the market. Others are waiting until everything settles down to buy. But some are saying, "Wow, what a great opportunity!"

No greedy and fearful quote
I'll skip that famous quote from Warren Buffett and instead focus on one of his lesser-known comments:

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? ... [Likewise], if you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? ... Many investors get this one wrong. ... Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

The last two months have dropped the prices of so many outstanding companies that to complain about that fact is like a hungry person complaining when the grocery store is offering a storewide sale.

Well, one objection to that view is to say that stock prices are going to stay down for a long, long time. But we've come out of every recession before, and it's not different this time.

OK, why not?
While the Wall Street panic of 2008 has been called "the worst financial crisis since the Great Depression", it's important for us to remember that what we face today is nowhere near as bad as the actual Great Depression. In 2008, we've had 22 bank failures, about 6.5% unemployment, and around 1.8% real GDP growth (which is expected to essentially flatten next year).

In the year following the 1929 market crash, 744 banks failed, 8.7% of the population was unemployed, and real GDP declined nearly 30% over four years. Yet those who bought in during the worst of that approximately doubled their money over the next five years.

The reason it's essentially not different this time is because we've seen all this stuff in recent memory. There have been bank excesses, high housing prices, and unwinding of leverage before. There have been major economic slowdowns before. There have been government bailouts and huge stimulus plans before. And we've always come through, even when several factors came together at once.

While this particular set of circumstances probably hasn't happened before, the problems are not insurmountable. And even if you believe that the world is going to heck in a handbasket, doesn't it pay to consider the possibility that it won't? So, while we cannot predict the future with a great deal of certainty, we can look back at other recessions to see what happened then.

Sources: National Bureau of Economic Research, Yahoo! Finance, and author's calculations.
*Market did not bottom until Oct. '02. The drop is calculated through then.

What leaps out is that for three of the past five recessions, it took just a few months for the market to recover all that it had lost and that in four, the market bottomed out well before the recession was over.

Like today, the exceptions had overarching concerns. In the 1970s, we had the oil shock and stagflation. In the early 1980s we had high inflation and interest rates. That put pressure on companies' performance and it wasn't until inflation fell that things got going again. In the early 1990s we saw high oil prices and unemployment coming on the heels of the collapse of nearly 750 savings and loans associations. In the 2001 recession, of course, there was the collapse of the dot-com bubble.

But see that? Buying when prices were down -- when "hamburgers" were cheapest -- led to respectable returns, even when it took several years to reach those pre-recession highs again.

High-quality beef
This country has come out of every recession so far. Therefore, anticipating that we'll come out of this one, I'm looking eagerly for buying opportunities. Not indiscriminately, mind you. I only want strongly capitalized companies earning real money for their investors. And I want them at bargain prices. Companies like the following:

* Data from Capital IQ, a division of Standard & Poor's, as of Nov. 21, 2008.

These are high-quality companies. Apple has a rock-solid balance sheet to survive this downturn. While it might sell fewer iPods and computers over the next several months, its products are popular and innovative enough that such a situation shouldn't last. Many pharmaceuticals are facing several drugs going off-patent soon, but Lilly is broadening its pipeline by purchasing other companies, such as ImClone. As for oil, well, prices have plummeted back to earth and OPEC is having difficulty swallowing that. Whether or not it succeeds in boosting prices, we still need oil for both energy and the chemical industry, so finding more will continue to be a priority.

Hungry?
So rather than shuffling around the grocery store, get out your basket to collect some of those beaten down companies. In a few years, you'll be glad you did.

That's what advisors Philip Durell and Ron Gross are doing over at Inside Value. In the introduction to the latest issue, they wrote, "We strongly believe this is the worst possible time to get out of the market. Investors should be looking to pile up shares of some of America's best companies at values that haven't been seen in decades."

To see what companies they believe are worth buying today, click here to check out the latest issue by signing up for a free 30-day trial. There's no obligation. Just lots of sound, inexpensive companies.

Jim Mueller loves both inexpensive beef and stocks. Of the companies mentioned, he owns shares of Apple and is a beneficiary owner of Microsoft. Apple and National Oilwell Varco are both recommendations of Stock Advisor, while Lilly is a choice at Income Investor. Microsoft is an Inside Value selection. The Fool's disclosure policy is a carnivore.