Businessman Investor

Touching base with the rational business psyche of stock market investors

Tuesday, October 4, 2011

The Uncertainty of Price Movement Versus the Certainty of Underlying Value in Bear Markets

The Age of the Bear. There's no guarantee the stock will stop falling despite buying it at a bargain. But never mind that, because the intent anyway is to capture gains not necessarily through stock price appreciation but through consistent, predictable underlying value.
This is Part 1 of a Series.

The following was my response to an online forum inquiry regarding bottom-fishing and timing the exact, opportune moment of getting into the bear market.

While bargains even during a bull market are possible, a bear market, such as what we're experiencing now, offers the best opportunity for fire sale stocks. You can never be so certain when the stock price will stop falling. You can only be certain, nonetheless, that the stock is already a bargain relative to some underlying value.

There's no guarantee the stock will stop falling even if you're able to buy it at a bargain price. Then again, the only margin of safety you can bank on is some underlying value—be that in the form of dividends, book value, free cash flow, or earnings. And that's what makes the difference. Because the intent is not necessarily to capture gains through speculative stock price appreciation, but through consistent, predictable underlying value.

And just imagine: when the market already starts offering double-digit dividend and free cash flow yields, or good stocks already selling below book value, I'd be so happy to exploit that.

Point is: in a bear market, value is your friend. And value is what makes it not a guessing game. Continue to Part 2: The Uncertainty of Bottom-Fishing versus the Certainty of Striking the Bargain Deal Now

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The information presented here is for educational purposes only. Under no circumstances should it be construed as a recommendation to buy, sell, or hold any stocks. If you choose to use this information, you do so at your own risk.

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