Bottom fishing in Bear Territory

Making money while the market keeps on crumbling!

In the second week of March, we marked an eerie anniversary: March 10, 2003, was the third anniversary of the NASDAQ’s all-time high. But the days of this El Dorado of the Clinton Era have come and gone. And most of the other global financial markets flying high in the mid and late 1990s have also found the Fountain of Youth—turning back the clock to lows not seen for years.

Unfortunately, as in real life, youth and riches seem to be mutually exclusive in the world of financial markets. Having shed more than seven years of gains, Germany’s DAX now looks like nonagenarian WWII German movie vamp Marika R–kk after applying a bucketful of the age-defying facial lotion Hormocenta she used to hawk. (The moribund Neuer Markt, NASDAQ’s Teutonic twin, is barely alive at this point.) London’s FTSE 100 recently closed at levels not seen since July 25, 1995. And that’s nothing compared to Tokyo, whose Nikkei 225 looked 20 years younger on March 10.

After three years of stock market declines and trillions in investor losses, the question most people ask with regard to stocks is not what to buy, but why buy anything at all? Why throw good money after bad into the gaping maw of one of the most brutish bear markets in history?

Good stocks are hard to find

If you expect me to come up with a bunch of reassuring generic claptrap about bargain hunting and relative value—the stuff your mutual fund managers send out at year’s end—I’m about to disappoint you. Because the simple fact is, there aren’t a lot of reasons to buy stock right now.

Sure, the market may be bottoming, and the economy may be turning around. But if you’ve been paying attention the last few years, you know the market and the economy have made more false starts than a high-school athlete after imbibing a six-pack of Jolt Cola. And nothing in recent economic data suggests that we’re about to see any fundamental change.

What if there’s no “next big thing in tech”? What if there’s no new wave of consolidation creating next year’s major conglomerations? What if Russia and Argentina (this year’s unlikely highlights of global market achievement) follow the rest of the world until there are no attractive emerging markets left? And what if there’s no imminent upturn in the business cycle to support higher stock prices?

With no visible catalyst for stock prices, it’s back to basics for investors. Lest we forget, the basics of investing success are pretty simple. To loosely paraphrase Warren Buffett, making money in the stock market is as easy as buying good companies at a reasonable valuation.

Unfortunately, there aren’t a lot of those good companies out there. The remnants from the stock market bubble can still be seen in stock valuations. General Electric (GE:NYSE) still trades at 2x revenues, even though revenues are projected to grow just 5% from 2003 to 2004. Cisco (CSCO:NASDAQ) trades at a P/E of 33 and over 5x revenues, even though revenue growth is virtually stagnant. Wal-Mart (WMT:NYSE), Microsoft (MSFT:NASDAQ), Coca-Cola (KO:NYSE) and Johnson & Johnson (JNJ:NYSE) all share one thing in common—they trade at historically high valuations, even after three years of steady declines.

Now, clearly, there is an economic recovery priced into these stocks. Business will get better, eventually. The only question is… when? And most investors seem to have learned that there’s no point in paying inflated stock prices for an economic recovery that has yet to materialize. Not only does the recovery have to occur so that your stock can justify its valuation, you are also exposed to losses if the recovery is delayed or fails to come at all.

Before I go on, I want to clarify one thing. You know by now that I’m not a “depression-is-coming-bury-your-money-in-the-backyard” kinda guy. I believe the American economy is the most dynamic on the planet and it will rebound and lead a global recovery. I’m also a realist. And I’m not about to risk any money (mine or yours) trying to time an economic upsurge.

As I see it, there are only three investment strategies that can work in the current market. There’s long-term value, bottom fishing for growth, or outright vulture capitalism. Of these, only two are available to the investing public—long-term value and bottom fishing for growth.

When I convened the Taipan Think Tank for this April issue, I put my question to them: How can we make money for our subscribers this month?

The ensuing debate was heated, as you might expect: Not for nothing do I bring together half a dozen hardnosed analysts every month… each with fundamentally different principles and philosophies of how to make—and keep!—money in the markets. This month, our editorial board agreed that Brit Ryle, chief trading strategist of Taipan Trader, had the most promising lead. Here’s what he has to say: