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Market plunge makes investments in good firms a bargain

November 3, 2008
America is having a 40-percent-off sale. The merchandise for this sale will not be found by thumbing through the usual newspaper inserts advertising consumer goods, but instead can be found listed on the stock pages of the business section.

The stock market rout that began in September and picked up steam in October has taken some quality companies to prices that are the cheapest they have been in decades.

Some of the wisest investors are weighing in. On Oct. 17, Warren Buffett wrote a rare op-ed piece in The New York Times, proclaiming that he was buying stocks. The last time he wrote such a piece was in November 1974 during the depths of that stock-market swoon. In that famous Forbes article, Buffett said he felt like an "oversexed guy in a harem," with so many attractive stocks to choose from. By the time the article was published, the market had shot 15 percent higher.

Buffett acknowledges that he has no idea what the market will do in the near term. But for investors looking out five to 20 years, stock prices are at levels that will deliver returns in excess —perhaps far in excess —of Treasury bonds, money markets, CDs or many of the places investors are flocking to for safety.

Buffett's sidekick, the curmudgeonly Charlie Munger, also has been buying stocks. And Jeremy Grantham of the institutional investment firm GMO, who's often labeled a "perma-bear," reluctantly wrote in his third-quarter newsletter that investors should do some buying.

Of course, the vast majority of investors are doing just the opposite. The selling has been relentless with the S&P 500 index down 20 percent so far in October at press time. According to Trim Tabs, mutual fund outflows in August, September and October are the three worst months on record. Leveraged investors, namely hedge funds, are being forced to sell to pay back their borrowings.

Investors should take this period and turn it upside down in a comparison to early 2000. In February 2000, mutual fund inflows were at record levels and the book Dow 36,000 was all the rage —literally a month before the market plummeted. Investors were looking in the rearview mirror at the spectacular gains that had already taken place and were extrapolating them well into the future.

Today, concurrent with record fund outflows, pundits are predicting further punishing losses on stocks, closures of stock markets, and gold buying.

Nobody knows when stocks will bottom. Some say we still haven't seen that final capitulation where even steadfast investors throw in the towel in a selling climax. Yet, many bear markets have ended quietly in investor apathy. Therefore, waiting for a sign to buy is fruitless.

The market will bottom long before the economy turns up. Buffett notes, "If you wait for the robins, spring will be over." He counsels investors to take Wayne Gretzky's advice: "I skate to where the puck is going to be, not where it has been."

Today, investors can put together a shopping list of quality blue-chip stocks selling for 50 percent below their highs, with dividend yields in excess of 5 percent. And as a buyer of any item, it doesn't get much better than buying from someone who has to sell.
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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