This Is How to Win in This Market
Aug 10th 2011 1:25PM
Updated Aug 10th 2011 1:26PM
I don't have to tell you that the markets have been absolutely crazy. You've seen it, felt it, and probably most of all -- heard it. It seems everyone has had something to say about this wackiness.
But while you may have heard from many different voices, the question is who should you be listening to? I'm obviously biased, but my first suggestion is to shut off the shouting on TV and tune into the sober words from some of my fellow Fools. They've been giving general reminders to help you keep from panicking, answering reader questions, and pointing out good buys.
Of course, we Fools aren't the only ones worth listening to as Mr. Market puts his underwear outside his pants and runs around the streets screaming bloody murder. At the end of the trading day today, I received a note from one of my favorite investment firms, Tweedy, Browne, which had this to say about the recent turmoil:
Uncertain markets are characterized by increased volatility and correlation between asset classes, as well as increasingly shorter time frames for investment decisions. None of this, in our opinion, will improve the probabilities of earning a satisfactory return over a reasonable period of time. Rather, we think that in most instances, these will improve the odds of the opposite outcome.
I want you to take special note of the phrase "investment decisions." So much of the focus over the past few days has been specifically on selling, and it would have been easy for Tweedy to echo that. But it didn't. It's suggesting that with increased uncertainty, investors are making rash decisions when it comes to both selling and buying.
"But," you may be thinking, "isn't it Foolish to take advantage of big drops like this to buy good businesses at better prices?"
The short answer is "Yes"
By the time markets closed after the disastrous day on Monday, the S&P 500 had dropped nearly 17% in roughly two weeks. A great many individual stocks dropped a heck of a lot more during that stretch. As a result, many quality companies were suddenly much cheaper for investors.
But buying intelligently during a panic like this isn't something you can do at the drop of a hat. As Tweedy, Browne reminds investors in its letter, it focuses on buying "a good business at a very attractive price." That's a simple enough concept, but if you want to make wise buys during a market panic, you need to already know which businesses are good businesses and what constitutes an attractive price for those businesses.
Panic or not, randomly throwing money at stocks is always a bad plan.
Enter: The watchlist
A great many Fool articles have highlighted our free watchlist in recent months. The timing couldn't have been better. By adding stocks to a Foolish watchlist, you can keep up to date on the happenings at the companies you're watching and get to know them better. Maybe more importantly, it gives you a nice, clean list that you can perform your due diligence on and have right at your fingertips when prices drop quickly and drastically.
Over the past few days, I took advantage of the fast-falling prices in my personal portfolio by jumping in as a buyer. But it was only because I had stocks on my own watchlist that I knew which businesses I wanted to own and what prices I wanted to pay.
Charge up your watchlist
When it comes to digging up stocks I might like to invest in, I keep it pretty simple at the outset. I look for companies that earn attractive returns on their capital, reward their shareholders with dividends, and have stocks that sell for low multiples of earnings.
If you're looking for stocks that fit this description, the five below are a great place to start.
Return on Capital
Forward Price-to-Earnings Ratio
|ExxonMobil (NYS: XOM)||18.2%||2.7%||8.0|
|Microsoft (NAS: MSFT)||28.0%||2.6%||8.5|
|3M (NYS: MMM)||17.6%||2.8%||11.9|
|Bristol-Myers Squibb (NYS: BMY)||19.0%||5.0%||11.6|
|Limited Brands (NYS: LTD)||17.8%||2.5%||12.8|
Source: Capital IQ, a Standard & Poor's company.
Based on the good-looking numbers in the table, these stocks could all be good buys, but your work isn't done here. The idea is that you add these companies -- or other companies that you might like to invest in -- to your watchlist, dig into each with further research, and then keep the names on the list that qualify as businesses you'd like to own. As you add new tickers over time and continue your research, you'll build up a nice list of great companies that you've researched and are ready to buy when Mr. Market holds a marketwide sale.
You can add any of the stocks above to your watchlist by clicking the "+" next to the ticker. If you don't have a watchlist yet, but are raring to get started, you can create your free Foolish watchlist by clicking here.
At the time this article was published The Motley Fool owns shares of Limited Brands and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft and 3M, as well as creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Matt Koppenheffer owns shares of 3M and Microsoft, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.
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