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