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Money Is Made In Down Markets
Investing great Shelby Davis once commented that investors make money in bear markets. It's just that they don't know it at the time. Hopefully the past two years are still fresh in the memory banks for most. After a long and terrible 2008, 2009 rewarded those who had the courage and conviction to buy when share prices were absolutely hammered. The market is still far above those March 2009 levels, but it's never a bad time to remember Mr. Davis's timeless observation.
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Price Paid Determines Value
This week started off with a sharp decline in consumer confidence leading to a near 3% drop. What lies ahead is anyone's guess. But such a drop in confidence should really come as no surprise. Consumers are an emotional bunch, and in the last month we've had the expiration of the first-time buyers' homeowners credit, the worst oil spill in history, on top of the looming fear that the economy is headed for a double dip.
As a result, markets have been more bearish over the past several weeks. Share prices have gone down, and expectedly so considering the year-long rally. When share prices decline, that's a good thing if you are a shareholder with a long-term view. Who wouldn't want to buy a good company for less? (For more, see Adapt To A Bear Market.)
A Diverse Lot
Gamestop (NYSE: GME) is a retailer of new and used video games. The used video game business is very profitable. Most hardcore video gamers have no use for a game once they have mastered it, so they are willing to sell to Gamestop to recoup some money. Conversely, those same gamers prefer to buy the less-expensive used video knowing that they will only be playing it for a limited time. The company has a forward P/E of less than 7, a pristine balance sheet and trades near book value. The company's operating margins of nearly 7% beat out specialty retailer Best Buy (NYSE: BBY) and even online retailer Amazon.com (Nasdaq: AMZN), despite the fact that both trade for higher multiples to earnings and book value.
CapitalSource (NYSE: CSE) is a California-based financial institution that recently used the financial crisis to acquire a deposit base on the cheap. Trading at 80% of book value today, it's an attractive bet, especially if the price goes down. Even better, value investor legend Seth Klarman of Baupost owns a nice chunk of shares.
Buy Low, Sell High
Buying low and selling high is the oldest adage in the investing lexicon. It would make sense that the best way to ensure buying low is to buy the best businesses when markets are declining. (For more, see The Value Investor's Handbook.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 20 Tools For Building Up Your Portfolio
Price Paid Determines Value
This week started off with a sharp decline in consumer confidence leading to a near 3% drop. What lies ahead is anyone's guess. But such a drop in confidence should really come as no surprise. Consumers are an emotional bunch, and in the last month we've had the expiration of the first-time buyers' homeowners credit, the worst oil spill in history, on top of the looming fear that the economy is headed for a double dip.
As a result, markets have been more bearish over the past several weeks. Share prices have gone down, and expectedly so considering the year-long rally. When share prices decline, that's a good thing if you are a shareholder with a long-term view. Who wouldn't want to buy a good company for less? (For more, see Adapt To A Bear Market.)
Gamestop (NYSE: GME) is a retailer of new and used video games. The used video game business is very profitable. Most hardcore video gamers have no use for a game once they have mastered it, so they are willing to sell to Gamestop to recoup some money. Conversely, those same gamers prefer to buy the less-expensive used video knowing that they will only be playing it for a limited time. The company has a forward P/E of less than 7, a pristine balance sheet and trades near book value. The company's operating margins of nearly 7% beat out specialty retailer Best Buy (NYSE: BBY) and even online retailer Amazon.com (Nasdaq: AMZN), despite the fact that both trade for higher multiples to earnings and book value.
CapitalSource (NYSE: CSE) is a California-based financial institution that recently used the financial crisis to acquire a deposit base on the cheap. Trading at 80% of book value today, it's an attractive bet, especially if the price goes down. Even better, value investor legend Seth Klarman of Baupost owns a nice chunk of shares.
Buy Low, Sell High
Buying low and selling high is the oldest adage in the investing lexicon. It would make sense that the best way to ensure buying low is to buy the best businesses when markets are declining. (For more, see The Value Investor's Handbook.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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