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Taking Stock: Investors Go After Good Value

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The vertiginous drops in the stock market this autumn have kept everyone worried about just how far the market will fall. On Tuesday, when stocks rallied, the Dow Jones industrial average rose almost 900 points, closing at 9,065.12. Part of that enthusiasm was based on the assumption that the Federal Reserve would slash interest rates again on Wednesday — which it did.

So, is now the time to buy? NPR asked two seasoned money market managers to weigh in.

Why Did The Stock Market Rise So Much?

The sharp rise of 889.35 points "doesn't make a whole lot of sense," says Dan Wiener, chairman of Adviser Investments. Nothing fundamental changed in the market that would validate the 10.88 percent increase, and the expectation that the Federal Reserve would cut interest rates should have been "baked in" to the market since last week, he says.

What's more, the government released its consumer confidence number on Tuesday, and it was the worst on record, he says. While this number is not a stock market indicator, one might have expected it to move the market down, not up. The rise may also have been prompted by investor eagerness to enter the market while it is "trading on fear and uncertainty," he says.

Is Now The Time To Buy Stocks?

The market conditions now represent "perfect opportunities, particularly for young investors," says Wiener. Long-term investors, who have been putting money into stock investments, should "keep doing it," he says.

With portfolios that he manages, Wiener says, he has moved more of his clients' assets from overseas back into domestic markets. Portfolio managers whom he has spoken with have told him that they are "seeing opportunities in the market today that simply have never existed in our investment lifetimes," he says.

Given where prices are and given the alternatives – such as investing in Treasuries — he says that stock prices remain remarkably low, even after the 10 percent rise in the Dow.

At the same time, if someone is scared to be an investor, Tuesday's increase presents an opportunity to get out of the market. But Wiener says the real opportunity is to "upgrade the quality of the stocks in your own personal portfolio" and to invest in stocks if you have some money on the sidelines.

Wiener says that "there are a lot of very strong companies that are selling at huge discounts to what even the most fanatical value investor would consider fair value."

Portfolio managers are "finding values in companies they never found values in before," he says. Typically, managers have watch lists for certain companies and with stock prices now so low, they're taking action. As a result, portfolios in December may have a completely different look than they had in August or September.

Does It Make Sense To Buy In One Chunk Or Gradually?

Paul Larson, editor of Morningstar StockInvestor and a portfolio manager, says that he has been buying stocks gradually by "trying to space my purchases over time." He says he is not trying to "time the bottom."

Like Wiener, he sees plenty of buying opportunities for long-term investors, because prices are so low, as are P/E, or price-to-earnings, ratios. A P/E ratio is derived by taking a company's market value per share and dividing it by earnings per share. It's one measure that investors use to judge the value of a stock, because it shows how the market values a company's shares relative to the profits it is making.

The last time the P/E for stocks was this low was in the 1970s, he says, but that was during a period of "hyperinflation." Larson says people should invest only funds that they won't need for a number of years to avoid having to turn around and sell at an inopportune time.

Larson says "stocks are pricing in the very bad economic conditions and then some." He says the bar is set "very, very low" for many companies and as a result, these companies "don't have to do much to exceed expectations and have their stocks rise over the long term."

What Role Is Fear Playing In The Market?

There are two kinds of fear in the market today. One fear is of losing one's shirt and the other is of missing the rebound in stocks, says Larson.

"Fear is at an all-time high," he says. And this is one of the reasons that we're seeing such extreme volatility in the markets. It's also exacerbated by the problems in the financial system, because companies haven't been able to get the cash they need to run their businesses.

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