Smart investors look for some stock gems amid the rubble
— -- Given the stock market's wretched performance this year, your current retirement plan may involve a modest part-time job, such as woodworking or forgery.
Before you take up a life of crime, however, remember that really rotten markets sometimes uncover opportunities. In fact, the worse the market, the more bargains you can find. And right now, you can buy stocks and bonds of the nation's best-run and most profitable businesses at astoundingly low prices. What's more, you can collect dividends and interest while you wait for the economy to recover and for other investors to regain their senses.
First, and let's not whitewash things here, the current market has all the appeal of a weekend in the local viper pit. The Dow Jones industrial average plunged 679 points on Thursday alone; it has shed 5,585 points, or 39%, in the past 12 months.
And not all of the selling is hysterical. The banking system is a mess and the economy is sinking. People who bought stocks under the assumption that profits would rise have good reason to rethink their position. Nevertheless, when investors dump stocks in panic, sometimes good stocks get thrown out with the bad. In fact, when the stock market is in panic mode, good stocks often get thrown out first. Consider the plight of some hedge funds, which are freewheeling investment pools for the extremely wealthy.
Many hedge funds borrowed to buy stocks, a technique that increases gains in a rising market, but amplifies your pain when stocks fall. These funds now have to raise cash to repay their margin loans and to pay off departing investors.
"The reason for the sharp decline is massive selling from hedge funds — not because they want to, but because they have to reduce their leverage," says Kenneth Heebner, manager of CGM Mutual. "It's the biggest margin call since 1929."
In a big, panicky decline, big investors can't sell their worst investments, because no one wants them. Instead, they sell their best holdings, because they can be converted into cash quickly. And sometimes that means that you can buy very good stocks at good prices.
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