Time for Value Investing
Today’s guest blogger is a friend of mine who also happens to work at Accenture in Chicago. Dhaval is a very hard working guy who I’ve had the opportunity to share many intellectual conversations with while being stranded in terminal 1 at the Cincinnati airport due to the often excessive wind and snow in Chicago (we both traveled extensively to Cincinnati last year). I’ve asked him to share with us his thoughts on how to deal with the current financial mess and I think he offers some good advice.
Index Investing
by Dhaval Garg
It is a scary time to be investing right now. Since the beginning of January 2008, the Dow Jones is down over 45%. Just in the last week, it fell by 435 points. The fall in the market is further fueled by seemingly endless news of rising unemployment, falling house prices, and companies going bankrupt. For those who have cash to spare and a longer investment timeframe, these market conditions present a golden opportunity to buy shares of severely undervalued companies.
In the past two years, a lot of companies have seen their value evaporate. Some of the companies saw their stock prices go down because their business was doing poorly. But there are also several companies whose share prices have gone down much more than the health of their business warrants. They have been punished either because of the market sentiment, or because funds have been liquidating their holdings. Relatively healthy companies with a lot of cash on their balance sheets are trading at P/E ratios of under 10. Even Warren Buffett, the poster child for value investing, thinks that it’s time to buy.
But how can those of us who are not Warren Buffett find the diamonds in the rough? After all, even some of the seemingly safe blue chip companies are faring poorly: Citigroup closed just over a dollar on Friday; GM’s auditors raised bankruptcy concerns, and investors are speculating that GE’s credit ratings might soon be cut.
I echo Brad’s and Will’s sentiments of not owning individual stocks. Instead, I suggest investing in value mutual funds such as Windsor II (VWNFX), and T Rowe Price Value (TRVLX), and riding out the market downturn. This recession has provided us with several bargains, and as Paul Romer has said, “A crisis is a terrible thing to waste.”
