AFTER LAST WEEK'S violent market swings, it's no wonder many investors feel they've awakened with a bad hangover. There's a sense of trepidation in the market, as though the comparative calm of the past few days is merely an ominous harbinger of more turmoil. I've felt it myself. After buying shares last week at what turned out to be pretty close to an interim low, Thursday turned out to be the single-best day I've ever had in the markets. Every stock I own rose, something I don't ever recall happening before. And yet I didn't feel euphoric. Even Thursday's rally seemed too much, too fast.
Emotions are a part of investing, and it's good to be aware of them. My feelings, however — and yours, for that matter — are irrelevant over the long term. Investors' collective emotions may indeed drive stock prices over short periods, creating buying and selling opportunities, as I believe happened last week. But over time, reason will prevail. Economic conditions and the resulting earnings eventually determine stock prices, which is why I feel it's important to follow a discipline that helps take emotions out of investing decisions.
This week Nasdaq remains below my previous buying threshold of 2138, which means that if you decided to ride out last week's turmoil, it's not too late to add to your stock portfolio. Plenty of pundits have been warning this week that the market is likely to "retest its lows," and that investors should wait until the turmoil is over. The problem is, how do you know when that happens? If you wait for the security of a rising market, and the comfort of everyone else telling you to buy, chances are that you will have missed most of the gains.
I've been encouraging readers to develop a shopping list for times like this, when stocks move into bargain territory. Many of you have nonetheless written to ask what to buy. There's no single answer, since every investor, and every portfolio, is different. But I'll share my reasoning about the positions I added last week, which should illustrate some broad approaches.
Stocks You've Always Wanted but Thought Were Too Expensive
In my case, this was
Monsanto (
MON), a stock I've extolled for years in this column. I've been waiting to buy more, but it always seemed too expensive. Indeed, its price-to-earnings growth rate was so high that it earned a spot on my list of sell recommendations which ran earlier this year in my SmartMoney magazine column. Even at last week's low point, I wouldn't call Monsanto cheap at 30 times projected earnings. Still, the stock was off a respectable 15% from its high, and the company raised earnings guidance just a few weeks ago. I believe in the company's long-term growth prospects. If you want to own a stock, and the market hits a buying threshold, then you buy. There's a reason Monsanto didn't fall as much as other stocks, and it may never be a screaming bargain.
Stocks You Wanted to Own Long-Term but Sold When They Got Too Expensive BHP Billiton (
BHP) and
Rio Tinto (
RTP), two big Australian mining companies, fall into this category. As I explained in an
earlier column, I bought these stocks for three reasons: exposure to foreign markets, their likelihood to benefit from rising demand from industrializing countries like China and India, and as an inflation hedge. These are all long-term trends that are still unfolding. So why did I sell? The prices had run up too far, too fast, fueled by speculators. As it turned out, I sold too soon, as they and other commodities producers continued to soar on inflation fears. But last week, they were some of the hardest hit stocks, dropping about 25% from their recent highs.
Stocks That Were Subject to Panic Selling
In my experience, highly emotional selling often leads to buying opportunities. When I saw that the Indian market was rising and falling close to 10% in single trading sessions, that Russia was in free-fall, that Colombia had to stop trading in the midst of frenzied selling, I sensed that the collapse in emerging markets was bordering on panic. With so many markets having dropped, I stepped in and bought more of the
iShares MSCI Emerging Markets Index Fund (
EEM) rather than trying to play individual markets. Notwithstanding the recent market turmoil, the case for long-term growth in many emerging markets remains compelling, in my view. This also seemed a good time to boost my allocation to non-U.S. assets.
Stocks That Had Fallen Out of Favor Even Before the Turmoil
When markets are subject to broad selloffs, even value stocks get punished. In this category I place a broad swath of technology stocks, currently one of the most despised sectors. I've already devoted a
column to the case for
Microsoft (
MSFT), which hit a new 52-week low last week. Recently several analysts have been touting
Intel (
INTC) as another bargain. Although Intel has been one of the worst-performing components of the Dow Jones Industrial Average this year, its growth prospects are still pretty good, not to mention that it has a rock-solid balance sheet. Other big tech stocks, too, have been caught in the downdraft on the theory that higher interest rates will curb corporate spending on technology. That prospect strikes me as already fully reflected in these low prices. I agree that Microsoft and Intel represent tech bargains, but since I already have substantial positions in those stocks, I added shares in the
NASDAQ 100 Trust (
QQQQ) ETF.
The point is that many strategies can be implemented during a buying opportunity like the one that occurred last week and that still persists. But you have to buy something to take advantage of it. If you have no other ideas, you can always buy a broad-based index fund or mutual fund.
It's true that the market may go down. It may indeed retest its recent lows, or drop even further. It's also true that markets go up. Someday the market will hit a new high. When it does, you will look back at the prices on stocks today as bargains. And if you bought some of them, you'll be glad you did.
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