Friday, January 29, 2010

Investing In A Bear Market

We are in the 6th inning of the residential RE crisis and the 1st inning of the commercial RE crisis.

Most of you are trapped in normalized bull market valuation methods (Income Statements and Cash Flow statements) which states "earnings growth and cashflow" are what you should follow.

In a bear market you should be focused on the (Balance Sheets and Cash Flow Statements). Notice the switch from income statement to balance sheet.

Read some of my first few blogs and you will see before the residential RE crisis started in mass I was focused only on balance sheet items (cash and debt). I was right and the worst balance sheet stocks got killed not the ones with the biggest losses.

If you actually look at how I ranked builder stocks using cash and debt and applied it to other industries you would see the same result.

Why? When a bear economy is upon us credit markets tighten, loans do not get renewed, cash flow turns negative, borrowing costs go up, interest burden becomes magnified, asset prices drop, etc.....

Wall Street can't value stocks as easily when the future is uncertain and earnings go negative or are falling.

Bear markets are about surviving and the companies that thrive DURING AND AFTER a bear market are the ones with the best balance sheets buying assets on the cheap.

They are also the companies that have the cash to continue to invest in future product while their competitors are trying to stay alive vs. thinking and investing in future operational profit.

Be like the best companies. Stop listening to doom and gloomers, raise cash, invest in yourself, work twice as hard, stay focused and push forward doing whatever you have to in order to make money.

Invest it wisely. You may not make as much today, but deflation pushed all your consumer good prices down too. Everything is on sale even at the Chicken Ranch.

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