I'm a valuation investor. That's really what being Rule One investor means - investing in things when their prices are far below their values. Give me a value I can verify and a price that's half of that and I'm a buyer in most any kind of market.
I like to wait for an event to trigger a big emotional mistake by Mr. Market. That is often how a price gets so far away from a value. I'm waiting now as emotion builds in the US markets. Good things were supposed to happen in the US economy. Good things started to happen but now the good stuff is petering out; unemployment is sneaking back up, we're going to need QEIII by December, there is no possibility of a balanced budget between two totally opposite philosophies of government before the 2012 election and even then the stalemate could continue and meanwhile our debt grows by $40,000 per minute.
In fact, check out this debt clock. http://www.usdebtclock.org/index.html. Look closely. Watch what we owe to China go up at a $1000 a second. Look at what our government spends ($6.8 trillion) versus what we make, ($14 trillion). And look at what we owe when Social Security, Medicare, Medicaid and Prescriptions commitments are included in our debt - $54 trillion.
If we balance the budget tomorrow. We'd still owe $50,000 a year per family in interest payments on the existing debt.
How will we pay this debt off (assuming we've already balanced the budget)?
There are three ways:
1. Raise taxes and pray businesses and producers don't leave the country. The best way to do this is to eliminate the IRS and replace it with FairTax.
2. Continue what our Federal Reserve calls 'quantitative easing'. The rest of us call it 'printing money'. Unfortunately, our creditors will not lend us more as the debt comes due so we'll face foreclosure (Greece is in this position now) or have to raise rates which will exacerbate the problem.
3. Devalue our currency like Argentina. This will happen suddenly as in Argentina. You go to bed with a 401(k) worth $1,000,000 and wake up with it worth $100,000. Our debt will also be 1/10th of what it was. Again, more screams from creditors and no more lending to the US. We will have wiped out our debt and be forced into a balance budget. And we'll be faced with massive unemployment and probably a world-wide depression followed by war between China and India.
Of these, only #1 gets us through the night and its not likely to happen.
Which is why optimism is disappearing, everyone is starting to smell smoke and the Big Guys are slipping out of the theater.
So what to do? Get ready to buy when the fear is highest. Cash ain't great but I'm only in it temporarily while expecting to see some great companies on sale.
But aren't our problems too horrible to invest in? No. Not if you buy really good companies - businesses with big moats, great management and on sale at a great price. Standard Oil in 1932 was a really good deal. So were railroads. Big Phama. And many more. Know the value. Buy at half off. Sit tight. Even with a depression and a world war if you bought Coke in 1929 you would have made 10% compounded for 80 years. $1000 became $2.2 million. If you bought it two years later, you would have made 12% compounded - about $11 million.
Great companies are great investments even when the world nearly tears itself apart.
Now go play.
