Buy, Sell, or Go Back to Bed?

Whichever newspaper I read today, whenever I listen to the news on the radio or TV, it has been the same old, same old for quite some time now: the U.S. economy is anything but promising, productivity is slowing down, consumers are spending less and less, and the housing market is crumbling, while the stock markets have sent the remaining faithful on a truly nauseating rollercoaster ride.

Investors are asking the oldest question in the financial world whenever a recession raises its ugly head: Buy, sell, or go back to bed until it all blows over? Editors and analysts at Lombardi Financial have always believed that money can be made in any kind of market. But investors must first have to acknowledge that each time there is a downturn in the cycle, the volatility is going to be of a different kind and they should adjust their investing strategies accordingly.

You know the usual mantra that has been preached on both Wall Street and Bay Street — buy low, sell high? Well, what better opportunity to buy low than now, after markets on both sides of the border have erased gains from last year and are still sitting below the recent lows. Yet, buyers are still too few and too far between.

Granted, even good stock selectors have had it rough over the past few months. Whatever profits were made, most of them were eroded by the greenback’s vertigo-like decline. Still, there are many good stocks that went down far too low, dragged down by their “bad and ugly” siblings, and now might be a good time to get back into the game. Just take George Leong’s advice from two columns ago and avoid making huge trades until these volatile waters ease at least a little bit.

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What investors should be looking for are the “bottom-up” stocks, which would be quality companies with steady revenue and profit growth rates, which make real products or offer much-needed services that people would actually want to pay for, operate in healthy markets and boast low multiples. Add diversification to your risk-adjusted stock-selecting strategies, and you are going to be well prepared for more than mere survival.

Just bear in mind that, during tough economic times, it is easy for investors to lose confidence. When that happens, sell-offs follow. And no one can effectively hide in a sell-off, including the quality, bottom-up companies I just talked about.

As part of keeping your eyes on the ball, remember the weak U.S. dollar that has eaten most of your past year’s measly capital market gains even further? Well, that same dollar is very likely to give the U.S. ailing exports a very much-needed boost. Then there is the Fed that has gone on an aggressive interest-rate cutting spree, intended to alleviate some of the mess caused by the subprime mortgage debacle. As a by-product, reduced interest rates and low U.S. dollar are also likely to kick into higher gear for mergers and acquisitions in the coming months.

So, don’t go back to bed, but don’t be rushing into things either. Stick with defensive stocks that have a strong balance sheet and preferably pay dividends. With a well-diversified, balanced portfolio, you should be able not only to survive the current downturn, but also potentially outperform it.