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Gems in the stock market rubble

By Barbara Whelehan ·
Friday, August 12, 2011
Posted: 3 pm ET

The market malaise has not only wreaked havoc for you and me and everyone else involved in retirement planning -- the big institutional heavyweights were also dealt heavy losses in recent weeks. In fact, an article in today's Wall Street Journal suggests that mutual funds and pension funds are to blame for much of the wreckage because they're selling stocks in droves.

The seesaw markets made many of us dizzy: Monday the Dow closed down 635 points. Tuesday it plummeted but then recovered, ending the day up 430 points. Wednesday it fell again, down 520 points. And then yesterday it was up 423 points. So far today it seems to be in positive territory for whatever reason.

Everyone suffering

The largest public pension fund in the land, the California Public Employees' Retirement System, or CalPERS, lost $18 billion between July 1 and Aug. 9, 2011. Corporate pension plans sponsored by Standard & Poor's Composite 1500 companies in aggregate lost $191 billion in the first six trading days of August, according to Their funded status fell from 83 percent to 73 percent, a 10 percentage point drop, due to a combination of stock market volatility and a drop in yields on high-quality corporate bonds.

So are institutional managers freaking out? Yes. But I'm heartened by this revelation: CalPERS officials told the Associated Press that they view this meltdown "as a chance to hunt for stocks at bargain prices and are maintaining a long-term investment view."

Michael Dunn, chief research officer of TruColor Capital Management, told that institutional investors will have to go back to buying stocks because they'd be hard-pressed to find decent returns anywhere else.

And this morning on CNBC's Squawk Box, Wharton School professor Jeremy Siegel, author of "Stocks for the Long Run" and "The Future for Investors," said that valuations of stocks at 12 times earnings present a great opportunity for investors. "If you can just grit your teeth and get through this volatility, I think you'll do well in the long run," he said.

Get a thick skin and a plan

Losing money is a universally unpleasant experience. It's gut wrenching when it happens like a hurricane, with torrential winds and rain, followed by an eerie calm. The day after a hurricane, you can take a drive and view the wreckage. Likewise, after a market maelstrom, you can look for good businesses whose stock prices were severely damaged in the storm.

Remember in the fall of 2008, when Warren Buffett came out publicly and proclaimed that it was time to buy stocks? Those people who listened were rewarded by buying stocks while they were on sale. I followed his lead and bought the names he was buying at the time with a portion of my cash position, and it helped my drooping IRA recover a little bit faster. But I felt uneasy investing like a copycat, even though I was copying the greatest investor of our time.

So in January, I signed up for Morningstar's StockInvestor training program. It's expensive. It's rigorous. It consumed most of my weekends during the first quarter of this year. And it covers a lot of territory, including understanding financial statements, identifying businesses with competitive advantages, and how to value stocks using a ratio-based approach and one that measures intrinsic value. This last bit involves calculating the present value of future cash flows, which is pretty tricky and involves some guesswork. But the course includes weekly one-on-one conversations with an experienced coach, affording an opportunity to drive home concepts and ask questions.

Picking up a good book is another, cheaper way to go about it. One example: "The Little Book of Valuation: How to Value a Company, Pick a Stock, and Profit" by Aswath Damodaran, professor of finance at New York University's Leonard N. Stern School of Business. Damodaran also explains both intrinsic and relative valuation techniques, taking investors deeply into the analysis process in an effort to identify good businesses at various stages in their life cycles.

It's not an easy read by any stretch. But let me share with you three of his 10 rules of the road at the very end of his book:

  • Rule No. 2: Pay heed to markets, but do not let them determine what you do.
  • Rule No. 7: Look at the past, but think about the future.
  • Rule No. 9: Accept uncertainty, face up to it and deal with it.

Some experts say we're in a secular bear market, and after seeing so much downside volatility over the past 11 years or so, it's easy to conclude this is true. While it's not easy to grit your teeth and invest in the midst of turbulence, it may be a boomer's best chance to get ahead as retirement approaches.


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1 Comment
October 07, 2011 at 1:53 pm

Behind the expensive suits and the talking heads and the constant reassurances there is a simple truth. The Stock Market is and has always been a suckers game!

Consider the following:

1. The S&P 500 is a big barrel of money. When the money gets to a certain level, the Psychopaths drain it off. In order to get it to a certain level, you have to buy the B.S. and turn your life savings over to them.

2. Only a few insiders actually buy and sell stocks. These institutional investors and market makers bring the market down by selling stock into the market.

3. The S&P 500 represents 75 cents of every dollar invested in the stock market. That means 500 company stocks to sell when they want the market to crash. Not that hard to accomplish when you think about it.

4. The other branch of the Satanic Psychopaths catch all that falling money buy buying Put Options against the S&P. AS the S&P goes down, they are capturing all of that lost wealth.

5. My Clients have made anywhere from 20-50% returns over the last week by also shorting the stock market. One client made $2400 profit from a $3500 investment. Can your stock broker do that? If so, why aren't they doing it? Instead, they are standing idly by while you lose money!