Hi Everybody,I think that now to, maybe, the next few months is a terrific time to start buying good companies at reasonable prices. I'm especially partial to companies that seem to have a reasonable chance for increased demand for their product, but where I don't have to pay upfront for that possibility.I guess the appropriate questions are why now? and look where?I'll leave the answers to some of the experts.Why now?From Peter Lynch's "Beat the Street","In the festive atmosphere that surrounded a recent 300 point gain in the Dow in three weeks, I was the most depressed person on the panel. I'm always more depressed by an overpriced market in which many stocks are hitting new highs everyday than by a beaten-down market in a recession. Recessions, I figure, will always end sooner or later, and in a beaten-down market there are bargains everywhere you look, but in an over-priced market it's hard to find anything worth buying."From "The New Money Masters" by John Train,"Jim Rogers likes to look at his tried and true ratios to see how bad things can get; and when they reach the lower limit, he assumes they will start going the other way. When they have endless problems and yet there has to be such an industry, Rogers foresees a buying point. When he sees several major companies losing money and capital expenditures coming to a stop, then he looks for an industry recovery. Ben Graham's great rule was that one should by when a stock is so cheap that you can't lose. Rogers variation is that you should buy when there is a reason for a change for the better."A couple of qoutes from Mr. Buffett,"The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.""Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."Look where?From Peter Lynch's "Beat the Street","Digging where surroundings are tranquil and pleasurable may prove to be as unrewarding as doing detective work from a stuffed chair. You've got to go into places where other investors and especially fund managers fear to tread, or, more to the point, to invest."From Chapter 7 of Ben Graham's II,"Related to Bargain Issues and Special Situations, II proposes to obtain a better than average investment result over a long pull by requiring a policy of selection possessing a two-fold merit:1. It must meet objective or rational tests of underlying soundness.2. It must be different from the policy followed by most investors or speculators.II recommends 3 investment approaches that meet these criteria but each differ widely from one another and each may require a different type of knowledge and temperament.The three approaches are:1. The relatively unpopular large company.2. Purchase of bargain issues.3. Special Situations.Related to the relatively unpopular large company, if we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it's logical to expect that it will undervalue companies that are out of favor because of unsatisfactory developments of a temporary nature. The key requirement here is that the enterprising investor concentrate on the larger companies that are going through a period of unpopularity. The large companies have a double advantage. First, they have the resources in capital and brainpower to carry them through adversity and back to a satisfactory earnings base. Second, the market is likely to respond with reasonable speed to any improvement shown.Related to the purchase of bargain issues, a bargain issue is one which, on the basis of facts established by analysis, appears to be worth considerably more than its selling for. To be concrete, II suggests that an issue is not a true bargain unless the indicated value is at least 50% more than the price.There are two tests by which a bargain common stock is detected. The first is by the method of appraisal. This relies on estimating future earnings and then multiplying these by a factor appropriate to the particular issue. The second test is the value of the business to a private owner. This value is often determined chiefly by expected future earnings, like the first test, but in the second test more attention is likely to be paid to the realizable value of the assets with particular emphasis on the net current assets or working capital.The same vagaries of the marketplace that recurrently establish a bargain condition in general also account for the existence of many individual bargains at almost all market levels. A mere lack of interest or enthusiasm may impel a price decline to absurdly low levels. Thus we have what appear to be two major sources of undervaluation:1. Currently disappointing results.2. Protracted neglect or unpopularity.However, neither of these causes, if considered by itself alone, can be relied on as a guide to successful common stock investment. The many experiences of this type suggests that the investor would need more than a mere falling off in both earnings and price to give him a sound basis for purchase. He should require an indication of at least reasonable stability of earnings over the past decade or more, plus sufficient size and financial strength to meet possible setbacks in the future. The ideal combination here is that of a large prominent company selling both below its past average price and its past average price/earnings multiplier. (With a possible 20x earnings p/e ceiling.)"ZB
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