| Hello Fellow-Investor. | | | | Companies with high returns on equity, little or no |
| When stock markets drop, especially significantly, it is | | | | debt, that aren't affected too much by economic |
| obviously not very thrilling for an investor unless he | | | | trade cycles and that operate in areas where |
| invested in a down market. | | | | competition is less brutal. Especially in the long-term. |
| But a dropping market might not necessarily be such | | | | Because in the event of a recovery, for example, |
| a bad thing after all. Down markets – more | | | | Wal-Mart is more likely to recover sooner than a |
| often than not – can present perfect buying | | | | small specialty retailer. The owner of smaller |
| opportunities. | | | | companies may find himself waiting considerably |
| Turning Bad News Into a Lucrative Opportunity for | | | | longer for his shares to realize their full value in the |
| Your Portfolio | | | | market. |
| Even the best companies, industries, and sectors fall | | | | Does management have an excellent track record? |
| out of favour from time to time. A well-informed | | | | The best indicator of future performance is past |
| investor, with some cash and a firm understanding of | | | | results. Great management tends to produce great |
| the situation, can calmly get into a turbulent market | | | | results for everyone involved, including the |
| and buy up shares of these underdogs at a fraction | | | | shareholders. |
| of their value. Or, you can buy put options and profit | | | | If a company has encountered significant problems |
| from a market that's in a downtrend. | | | | for consecutive years while the industry in which it |
| But how do you know which companies are | | | | operates prospers, it is likely that management has |
| permanent losers and which are undervalued gems? | | | | been unwisely retained. In such cases, you and your |
| Consider the following to determine if you should | | | | pocketbook would be better off ignoring the empty |
| invest your money or keep it stashed in cash: | | | | promises of executives who are only interested in |
| Is the problem temporary or long-term? | | | | keeping their jobs. |
| You must be careful not to simply invest in a | | | | The quality of management question is perhaps one |
| company because everyone else is running from it; | | | | of the most important an investor must pose to |
| sometimes there is reason to run! Even after the | | | | himself. Coca-Cola is an excellent example of how |
| share prices of companies such as Lucent and United | | | | good management can make a great company even |
| Airlines had been cut by 75%, they still did not | | | | better. |
| constitute a good investment. There are many | | | | When Roberto Goizueta became CEO the business |
| companies that aren't worth buying at any price. | | | | became a truly global powerhouse, throwing off cash |
| Trash is trash, regardless of how much you pay for | | | | to its stockholders faster than they could gulp it |
| it. | | | | down. |
| In some cases, problems arise that are the result of | | | | Are you patient enough able to wait out the storm? |
| one-time mistakes on the part of management. | | | | After you've determined that the problem a |
| During the Savings and Loan crisis, for example, bank | | | | company has is temporary, management has an |
| stocks were beaten down to almost comical levels. | | | | excellent track record, and the business possesses |
| An investor who mentioned he was purchasing | | | | excellent economics, there is still one question |
| shares of these institutions was immediately scorned, | | | | remaining before you should purchase a seemingly |
| mocked, and considered crazy by even close friends. | | | | undervalued stock. |
| At the same time, firmly entrenched companies such | | | | Are you patient enough to wait out the company's |
| as Wells Fargo (which boasted a solid balance sheet, | | | | troubles? Do you have the luxury of waiting for the |
| established reputation, top-notch management, and | | | | company's value to be reflected in the share price? |
| steady customer base), were hit just as hard as | | | | Bear in mind what I always preach. "Trading is a |
| banks of lesser quality. | | | | business and should be treated like one!" It's not a |
| At some point though, those that had exercised | | | | lottery game. |
| courage and relied on their analytical judgment by | | | | As investors, we know that a good company will |
| purchasing shares in such banks found their portfolios | | | | eventually be recognized by the market; we just |
| much fatter. Remember the words of a very wise | | | | don't know when. |
| man; "you are neither right nor wrong because the | | | | In the short run, anything can happen. There is |
| crowd agrees with you; you are right because your | | | | nothing to stop an undervalued stock from falling |
| analysis says so." | | | | significantly further in price. |
| Is the business an excellent business with a suitable | | | | You must have the time to wait for the inevitable |
| market capitalization? | | | | result of wise investing, regardless of whether it |
| In your attempt to look for under valuated | | | | takes a week, month, or several years. In the end, |
| companies you should focus your interested more on | | | | your sound analytical judgment and unshakable |
| large market leading companies instead of smaller | | | | patience should be rewarded. |
| ones. | | | | |