Small Stocks --- The Best Stocks to Buy in This Cold Market

You're probably getting all sorts of conflicting messages these days.

On the one hand, you have gloom-and-doom predictions from luminary economists like Nouriel "Dr. Doom" Roubini, calling an S&P 500 bottom possibly as low as 600 -- more than 20% below yesterday's close.

On the other hand, you have the world's most respected investor, Warren Buffett, saying that now is a good time to buy. Buffett is also putting new money to work, buying shares of Burlington Northern (NYSE: BNI) and Ingersoll-Rand.
Here, with so much debate over what has been roundly dubbed "the worst financial crisis since the Great Depression," we looked back at how various strategies fared during each of the other financial crises since the Great Depression, and try to get some useful guide to go through this economy depression.

To get started, I turned to trusty data from Ibbotson Associates, a leading authority on investment research. I calculated the historical returns for cash, bonds, and stocks for those who invested the year following the start of each recession -- exactly the point at which we find ourselves today -- and measured the five-year annualized return for each period.

Here are the results:

*Data from Ibbotson Associates, Salomon Brothers Long-Term High-Grade Index, National Bureau of Economic Research, Consumer Price Index, author's calculations.
**Returns calculated from 1971-1975.

Rule your recession
Three lessons stand out from this data:

Stocks outperform bonds and T-Bills most of the time, and by large amounts. And remember, these are just averages -- stronger index components like PepsiCo (NYSE: PEP) and Procter & Gamble (NYSE: PG) did even better than the S&P 500 average the last time around.

Unless you need money or plan on investing it, don't park your capital in cash or Treasury bills. If you're bearish enough on stocks to avoid the stock market, history shows that it's much better to be in a diversified batch of long-term, high-grade corporate bonds.

The only period the S&P 500 lost money was the 1930-1934 deflationary death spiral, when deflation ran a chilling 5% annually. Inflation currently sits around 0.4% annually, but so long as it doesn't plunge well below zero and remain there -- something even Roubini, the most prominent stag-deflation advocate, doubts will happen -- investors who are looking to buy a diversified basket of stocks today are well-positioned.

But that's not the whole story
Various studies -- including one of my own -- show that small caps tend to outperform their larger counterparts by a significant margin, particularly in recessions. To confirm this, I ran the numbers once more to include the smallest quintile of stocks:*Data from Ibbotson Associates, Salomon Brothers Long-Term High-Grade Index, National Bureau of Economic Research, author's calculations.

**Returns calculated from 1971-1975.

Small stocks outperformed T-Bills, bonds, and the S&P about two-thirds of the time -- and they did so by a ridiculous margin.

But how much dough are we talking about?
A few percentage points might not seem like much, but remember, these are annualized figures. Here's how much money $1,000 invested and held for each five-year period would be worth today, adjusted for inflation:
The data over 13 recessionary periods and various academic studies reveals a powerful lesson: Small stocks really are the best stocks to consider buying in this market.

Why are small stocks so great?
There are many reasons for why all of the market's best stocks have been small caps. Among the three most prominent are:

Small caps attract less coverage from major brokerage houses and consequently are more likely to be mispriced.

Smaller stocks have more opportunities for growth.

Smaller companies have the ability to be nimbler in tricky situations. Starbucks (Nasdaq: SBUX) has been handling the complex logistics of closing 8% of its more than 7,000 U.S. stores. On the other hand, if tiny Buffalo Wild Wings had to close 8% of its 575 stores and reallocate resources, it could do so relatively easily.

These may also explain why all of the top 30 performers that emerged from the 2001 recession were small or mid caps, including USG, (NYSE: USG), Coach (NYSE: COH), and Research In Motion (Nasdaq: RIMM), which each rose more than 700%.

Source from: fool.com

The 5 Biggest Stock Market Myths One Should Know

When fiascos like the Enron bankruptcy, auditing scandals and analysts' conflict of interest occur, investor confidence can be at an all-time low. Many investors are wonder whether or not investing in stocks is worth all the hassle. At the same time, however, it's important to keep a realistic view of the stock market. Regardless of the real problems, common myths about the stock market often arise. Here we go over these myths in order to bust them.

1) Investing in stocks is just like gambling.
This reasoning causes many people to shy away from the stock market. To understand why investing in stocks is inherently different from gambling, we need to review what it means to buy stocks. A share of common stock is ownership in a company. It entitles the holder to a claim on assets as well as a fraction of the profits that the company generates. Too often, investors think of shares as simply a trading vehicle, and they forget that stock represents the ownership of a company.

In the stock market, investors are constantly trying to assess the profit that will be left over for shareholders. This is why stock prices fluctuate. The outlook for business conditions is always changing, and so are the future earnings of a company.

Assessing the value of a company isn't an easy practice. There are so many variables involved that the short-term price movements appear to be random (academics call this the Random Walk Theory); however, over the long term, a company is only worth the present value of the profits it will make. In the short term a company can survive without profits because of the expectations of future earnings, but no company can fool investors forever - eventually a company's stock price can be expected to show the true value of the firm.

Gambling, on the contrary, is a zero-sum game. It merely takes money from a loser and gives it to a winner. No value is ever created. By investing, we increase the overall wealth of an economy. As companies compete, they increase productivity and develop products that can make our lives better. Don't confuse investing and creating wealth with gambling's zero-sum game.

2) The stock market is an exclusive club in which only brokers and rich people make money.

Many market advisors claim to be able to call the markets' every turn. The fact is that almost every study done on this topic has proven that these claims are false. Most market prognosticators are notoriously inaccurate; furthermore, the advent of the internet has made the market much more open to the public than ever before. All the data and research tools previously available only to brokerages are now there for individuals to use.

Actually, individuals have an advantage over institutional investors because individuals can afford to be long-term oriented. The big money managers are under extreme pressure to get high returns every quarter. Their performance is often so scrutinized that they can't invest in opportunities that take some time to develop. Individuals have the ability to look beyond temporary downturns in favor of a long-term outlook.

3) Fallen angels will all go back up, eventually.
Whatever the reason for this myth's appeal, nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in terms of the old Wall Street adage, "Those who try to catch a falling knife only get hurt."

Suppose you are looking at two stocks:
XYZ made an all time high last year around $50 but has since fallen to $10 per share.

ABC is a smaller company but has recently gone from $5 to $10 per share.

Which stock would you buy? Believe it or not, all things being equal, a majority of investors choose the stock that has fallen from $50 because they believe that it will eventually make it back up to those levels again. Thinking this way is a cardinal sin in investing! Price is only one part of the investing equation (which is different from trading, whch uses technical analysis). The goal is to buy good companies at a reasonable price. Buying companies solely because their market price has fallen will get you nowhere. Make sure you don't confuse this practice with value investing, which is buying high-quality companies that are undervalued by the market.

Below is a chart of Nortel's decline. Imagine how much money you would have lost had you bought Nortel just because it kept on hitting new lows!

4) Stocks that go up must come down.
The laws of physics do not apply in the stock market. There is no gravitational force that pulls stocks back to even. Over ten years ago, Berkshire Hathaway's stock price went from $6,000 to $10,000 per share in a little more than a year. Had you thought that this stock was going to return to its lower initial position, you would have missed out on the subsequent rise to $70,000 per share over the following six years.

Below is a chart of Wal-Mart from 1997 to 2000. We've circled every time the stock chart hit resistance to reaching a new high. Those investors who were waiting for the stock to come back to earth would missed out on a return of 500% or more. What's behind the stock? It's the company! Wal-Mart is another example of an excellent company that has dominated its industry by being innovative and creating value for both shareholders and customers.

We're not trying to tell you that stocks never undergo a correction. The point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock won't keep on going up.

5) Having just a little knowledge, because it is better than none, is enough to invest in the stock market.
Knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. It's those investors who really do their homework that succeed.

Don't fret, if you don't have the time to fully understand what to do with your money, then having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.

Conclusion
Forgive us for ending with more investing clichés, but there is another old adage that is very much worth repeating: "What's obvious is obviously wrong." This means that knowing a little bit will only have you following the crowd like a lemming. Like anything worth anything, successful investing takes hard work and effort. A partially informed investor is about as effective as a partially informed surgeon; he or she will only hurt themselves and those around them.

Source from: investopedia.com

How to invest in a down market

These days business newspapers filled with market crash news in a daily basis. But the business world is full with tips even in a down market. Can you invest at this time? The ultimate answer is “Yes”. Read below to get an exact idea to the right place to park your money.

Have you known what happened to Mr. Warren Buffett, the greatest investor, at this time? Yes, everybody losing in the market but he added another $500 Cr’s to his wealth. How?

Any one of us can do the same. This is NOT the time to invest in stock market but in the same time, this is the correct time to invest in stock market. These all depends on how your mind works and how much you are tied with your money. If you are dealing with money like a hen which is sitting on the eggs, you are not the right person to read this. Everyone has fear about money lose. But the truth is, intelligent action through well study and long term focus, stock market will never give you loses.

Remember, stock markets are at the bottom line and valuations are very attractive with all the companies. There are 2 major options in front of you to invest your money at this time of down market.

1. First option is very simple and it is secure. Park your money to bank FD’s for desired time and sits freely. Enjoy the interest what you are getting. Your money is safe. But what will do if the bank crash? That is your question to answer yourself.

2. Second available option is, you still have options to invest in stock market. It is not a joke. You can still invest in stock market if you think like Warren Buffett. You are well aware that stock prices touched the bottom line and valuations are very attractive. Yes it is. Financial turmoil or the stock market crash doesn’t mean that all companies are in lose. Why don’t you select large cap companies that have well established business as well as increasing earnings at these times too?

Yes. Invest at this time on the blue chip stocks of carefully selected companies. Don’t go behind any mid or small cap companies at least at this time. Blue chips are your best friends at this time. They have well establish business and it is impossible to close down such business to give you lose. So select such companies and invest on that. This was the method what Buffet was practically doing.

Valuations are very attractive and price of the blue chip stocks are in bottom line because of the financial turmoil. You can see there will not be any affect to there business and that is the best point you have to keep in mind to invest on that stocks.

Don’t panic after investing to well established companies or blue chip companies. Let it be there. Every down has an up. It will take time but, certainly the market it will go up. The only point to remember is, this is not the time to trade or invest your money for short time. If you decided to invest in stock at this time, invest with blue chip stocks and for long term.

Besides, there are some tips on investing in a down stock market. When things look their worst, and you really want to sell and get out, that is probably the time to buy! But always keep in mind that know your limitations.

It is a bad idea at this time, if you planning to invest bulk amount to mutual funds. Better, wait and see for some time before mutual fund investing. You can select good mutual funds to invest money in a SIP basis. If economic growth is intact, then there is nothing to bother.

Be a prudent investor. Keep your new investments only to the stocks of blue chip companies. Invest in good mutual funds ONLY in sip basis or park your money to the bank Fixed deposits. Never panic, be patient, the market will most likely come back over the long run.

How to be an informed investor

While investing, information is just like money. More precise information and knowledge you have, more successful you could be. How to be an informed investor, getting exact information you just need? There are some factors and homework an investor must do himself. This article pointing out some must required actions. Read the entire article below:

Read, read, read

Consider to read maximum. Reading great books, articles and newsletters will give you enough knowledge to select the right path at tight time. Not only that but, it will also give you enough knowledge on various aspects on investment instrument selections and valuations. A successful investor should spend enough time to find and read most useful books and articles to gain all required knowledge.

Acquire knowledge on available products to invest

Investment world is not small with one or two products. It is very vast and the success of an investor laying on the selection and combination of these products at the right time. To have a successful financial plan, an investor should aware about the advantages and disadvantages of all the investment products around him. He should be able to identify the right one and compare the same with all other similar products available in the market to identify the winner or the loser. A successful investor not only should have good knowledge about the products he deals with presently but, he should be able to understand and explain the features of various products available around him.

Watch business channels

Television especially business channels are necessary part to investors day to day life. This is a very good source to get updated information on latest trends and changes. I am not saying to believe and act as per what they are saying but, through business channels, an investor will get enough opportunity to identify best investment products to do own research to understand the investment suitability. Make this as a regular practice.

Usage of internet

Internet is the excellent source to get instant access to well written articles, valuable information, real time data and other similar information. Utilize the maximum and get enough knowledge about all the areas of investment practices.

Grouping and social networking sites

Social networking sites are a best source to share and take ideas. It is very helpful to identify whether your plan has any loopholes or chance of failure. You can also receive very good reviews on your ideas as well as winning ideas from experts who are also in the part of the group where you are in.

Don't believe everything blindly

A careful approach to the research reports and the words from self acting investment gurus required your own research and study to believe or avoid. Always have practical approach. Don’t believe anything without your own research. Research reports might have hidden traps to investors if blindly follow them. Through study and digging to the truth will help you to identify the fact and act as per that.

Chat with experts

Chat rooms are an excellent source to get real time information from experience people. Care should be taken about the person in the other end and don’t blindly believe him without your own study on what they are suggesting or recommending.

Participate to events

Participating events related to the subject is a good idea to get helpful information and knowledge. In my opinion, an investor should take the advantage from all the events happening around him. It can be an investor meets or an awareness section or a company general meeting. Whatever it is, participating to such events help an investor to meet people with similar thoughts as well as chance to contact experts. It is also helpful to clear any doubts and get prompt answer to your questions. It can also be used for building good friendships with other investors.

Passion on investing

This is the most important factor. Be passionate. Without passion, you can’t achieve anything. Learn from the real life of legend investors. They have enough passion to the profession and that lead them to great success. So be passionate or leave such profession immediately.


However, an informed investor doesn’t mean a successful investor. In addition, you have to learn to analyze and research the information you get, and make the right decision.