Last year's market crash knocked the stuffing out of many
stocks. Many of those beatings were well-deserved.
Money-losing car companies such as
General Motors and overleveraged investment
banks such as
Lehman Brothers had serious debt problems
that meant their demises were likely only a matter of
time.
But many companies were knocked down for reasons other
than the collapse of their financial house of cards. Some
fell because the overall economy slipped into recession,
taking their businesses along with it. Some dropped simply
because the overall market was tanking. As people pulled
money out of mutual funds, those funds needed to sell
anything that had liquidity in order to raise cash.
In other words, while some "cheap" stocks deserved their
haircuts, others are now serious bargains.
It's time to imitate Benjamin Graham
It's no coincidence that value investing -- the
strategy that made Warren Buffett rich and famous -- was
perfected on the heels of the Great Depression. With stocks
trading as if financial Armageddon were just around the
corner, it took a special kind of courage to buy during the
meltdown.
Yet that's exactly what value investing pioneer Benjamin
Graham was busy doing -- fine-tuning the concept of value
investing, and making his own fortune along the way.
These days, though the economy isn't
quiteas bad as it was during the worst of the
Depression, the
parallelsare certainly strong enough for you to stand up
and take notice. Unemployment is in the double digits in much
of the country. This current recession has lasted longer than
any since the Great Depression itself. And of course, the
stock market's 2008 plunge invites way too many comparisons
to the aftermath of the 1929 crash for comfort.
Whether or not we're really in the middle of the second
Great Depression, it makes sense to study investors like
Graham who were successful then. If history is repeating
itself, his strategies provide a tremendous road map on how
to invest successfully amid an otherwise nightmarish economy.
And if this isn't Great Depression: Part Two, well, disciples
of Graham -- such as Buffett -- have certainly been
successful enough investors to suggest that value investing
works outside of depressions as well.
The cheaper, the better
Perhaps the best part of the value investing strategy
is that it's so very straightforward. In essence, value
investors look to buy stocks for less than they're
objectivelyworth, and then simply hold on to their
investments until the market realizes that fact.
There's no rocket science involved, but you do need to be
willing to buy what the rest of the market is busy selling as
garbage -- provided there's really treasure buried there.
One way to tell whether the market has mispriced a
company, thus creating a value opportunity, is to look for
companies selling for less than their tangible book values.
Take a look, for instance, at these:
Company
Price-to-Tangible Book Value Ratio
Price-to-Normalized Earnings Ratio
Comerica (NYSE: CMA)
0.97
55.90
Great Plains Energy (NYSE: GXP)
0.95
18.00
Tesoro (NYSE: TSO)
0.79
5.93
PHH (NYSE: PHH)
0.70
5.65
Conseco (NYSE: CNO) Continued... |