Customer Service 1 (888) 261-2693
Please enter Search keyword. Advanced Search

The Risk in Stocks Hasn't Been This Low in 34 Years

By Dan Ferris, editor, Extreme Value
Thursday, October 23, 2008

You're going to think I'm crazy for writing this, but right now, there is less risk in stocks than at any time in 34 years.

If you won't take my word for that, take it from the greatest investor in history. On Friday, Warren Buffett said it's definitely time to buy. Buffett only buys when things are dirt-cheap... and he hasn't come out and made such an enthusiastic public statement since 1974.

Bullish as I am, I still think it's important for you to understand why so many investors have been selling stocks. The simple explanation is investors the world over, from the smallest individual account to the largest financial institution, have been liquidating their holdings all at once.

The big institutions are liquidating because they borrowed a lot of money and made investments whose value depended on home prices and credit. Home prices have fallen dramatically, and credit is hard to get now, so the value of their investments is down. That causes the people who lent them money to immediately demand more collateral or repayment.

Either way, those big investors who borrowed all that money must sell something to come up with the cash... and fast. Unfortunately, the housing-related investments they bought aren't popular right now and can't be sold quickly. So the large institutions are selling anything they can sell quickly. Stocks are liquid and sell quickly, so investors are calling up their brokers and telling them to sell everything right away.

That's why stocks have been falling so much. It's like a giant bankruptcy sale. Or perhaps, to be a little more accurate, it's a giant sale that represents a mass attempt to prevent bankruptcy.

Not only have overindebted investors been selling, many others are selling simply because... everyone else is selling. They're even selling gold by the truckload.

Most stock investors don't even try to understand the businesses they're investing in. They buy a ticker symbol based on rumors and hype and hope it goes up. They're not really investing. They're gambling. So when stock prices fall, they get scared and sell, too. That's what makes the market really crash the way it has over the last few weeks.

When you understand the businesses you're holding, what they're worth, and what kind of future they have, you can sleep soundly at night, no matter what the share prices do in the short term. Peter Lynch, the famous Fidelity fund manager, says the secret to getting rich in stocks is not getting scared out of them. The secret to not getting scared out of stocks is to do your homework and know what you're holding.

The only rational thing for an informed investor to do in this environment is to hang on to good businesses that are obviously worth more than what they're selling for. I put the great businesses of the world like ExxonMobil and Microsoft in this category right now. Both are absurdly cheap world-champion cash generators. It's only when everyone sells do these excellent businesses go for such low valuations.

Far from being a scary environment, this is the most exciting time of all to be an investor. Opportunities are being created right and left. Great stocks are once again selling at dirt-cheap valuations. And far from being risky, it's a safe time to buy right now.

Good investing,

Dan Ferris

Market Notes


Yesterday marked another "behind the woodshed" day for commodities.

Receiving a bullet to the head were blue-chip names like Freeport-McMoRan (copper), Suncor Energy (oil sands), Petrobras (oil), Goldcorp (gold), and Cameco (uranium). All hit new yearly lows on big volume. All are down more than 50% since June. It's no wonder... Oil, gold, and copper are in clear downtrends right now. Which makes the action in natural gas all the more interesting... 

We've had a close on eye on "natty" for two reasons: 1) Our colleague Jeff Clark is bullish on the clean fuel. As we've mentioned many times, Jeff has an annoying habit of always being right... and 2) According to the latest trading data, a huge chunk of the hedge-fund world is bearish on natural gas. When everyone gets on one side of the boat, it always tips to the other side.

Now, here's where it gets interesting: Commodities tend to move together. If oil suffers a huge 7% decline in one day, there's a great chance that copper, gold, platinum, and natural gas will be down big as well. Yesterday, oil suffered that big decline... but natty barely moved. It's a bullish sign when a commodity refuses to fall when the whole "club" is hammered.

Recent Articles