Economic Upheaval and The Common Sense Investor
In an economic upheaval like we’ve been experiencing over the last year in the United States (and global) economy, The Common Sense Investor is forced to address two questions:
- Are the fundamentals strong enough to support a turnaround?
- Is there enough reliable data to identify the truly healthy companies?
As a value investor, I tend to get excited about major downturns like the current one that we’re in. That might sound sadistic, but in reality, it’s major downturns like the one that we are in which reveal great stock value. Since so many investors track the market as a whole, as it loses value it drags the price of strong, healthy companies down with it.
Normally, this is when The Common Sense Investor dumps money into the market.
However, in the current environment, there is a question that must be addressed: are the fundamentals of our economy strong enough to support a turn around? It does no good to plant crops at the end of a warm September with the prospect of a cold October.
Investors need to educate themselves on how deep the current crisis in the financial markets goes, and whether our economy is fundamentally in trouble or just encountering a minor correction.
Second, with all the corruption on Wall Street, investors have to ask themselves whether they have accurate data with which to make wise decisions. Several very smart investors that I know saw AIG only a year ago as a strong company selling at a value price. Why? Because they didn’t see that AIG was insuring crap. Obviously, AIG wasn’t broadcasting this message either.
At the end of the day, common sense investing requires two pieces of the foundation to be in place: 1) the fundamentals of our broad economy need to support productivity and growth and 2) the information that we use as investors to analyze companies needs to be reliable.
If those two pieces of the foundation are in place, then investors can locate strong, vibrant companies, selling at a cheap price. Especially in the current climate.
But is the current climate a cold April with the prospect of an oncoming economic summer? Or is it a mild September with the prospect of a cold October on its way? That’s the question that no one really knows.
Nonetheless, I’m going to start moving my money into the markets, as intelligently as I can. There’s no better time to do this then when everyone else is pulling out. Great companies at great prices = great profit.
