Down market brings opportunities

Washington Post:

For the average investor, the U.S. stock market is looking downright scary. One day it's plummeting. The next day it's soaring.

But for an aggressive investor like Josh Wilburn of Odenton, there is nothing to fear.

"I like it," Wilburn said. "You get some very rare opportunities when this happens. I don't know how low things will go, but there will be bargains."

When it comes to investing, what one person might consider a loss, another might consider a potential gain. As the renowned investor and philanthropist Shelby Davis once said: "You make most of your money in a bear market. You just don't realize it at the time."

Several financial advisers interviewed in recent days said now is a good time for bargain hunting -- that is, if you have a high tolerance for risk and you're not going to need your cash back anytime soon.

The last time stocks in the Standard & Poor's 500-stock index were so inexpensive for such an extended period of time was 1995, said Bill Barker, a senior analyst for the Motley Fool investing Web Site. "And that was a pretty good time to buy stocks," he said. Barker calculated the value based on the ratio of the companies' stock prices to their operating earnings.

If you're brave enough to shop now for stocks, how do you find a good deal?

First of all, advisers said, consider your long-term goals. If you're planning to buy a house anytime soon, don't put your down payment in the stock market. If you're nearing or in retirement, don't make any risky moves. Most of your money should be in bonds or cash anyway.

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Second, think about what advisers call your "time horizon." How long can you afford to keep your money invested?

Here are some historical data to consider: Since 1950, the average bear market has lasted 14 months, according to Jim Stack, president of InvesTech Research in Whitefish, Mont. An analysis of the S&P 500 index shows that stocks dropped an average of 33.5 percent in past bear markets, excluding 1929. If you bought stocks at a market peak, it would have taken you an average of 3.6 years to recover your money, Stack said, again excluding 1929.

The financial firm T. Rowe Price provided its own analysis of bear-market recoveries. In the past five bear markets, going back to 1976, the data showed that the longest it took for stocks to recover from their peak, then provide a 10 percent annual compound return, was almost eight years. The shortest amount of time was five months.

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There is more good advice from professionals. I would add that it is important to look at the companies that were hit hardest by the downturn. In 2001 the downturn revealed weaknesses and misdeeds by companies like Enron and Global Crossing and others. But there were quality companies in energy and telecommunications whose stock prices declined even though their quality as investments did not. The investment banking firms have taken the biggest hits so far this down turn. You need to look at them and see which ones were smartest in dealing with the problem and which ones are not likely to make the same mistakes again.