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Cheap Stocks for the Bear Market: Three free stock picks for your portfolio

Posted February 19, 2008

"Okay, so we know it’s bad 'out there…' and so does the stock market. That’s why the S&P 500 has tumbled nearly 80 points since the beginning of the year… and that’s why the stock market might continue floundering for months. But are financial conditions so bad that there is not one single stock to buy?" — Chris Mayer

by Chris Mayer, Whiskey and Gunpowder

Baltimore – (TFN):  Adversity breeds opportunity. That’s how financial markets work. I’m not sure if the global stock markets have suffered enough adversity lately to create really great opportunities, but I’m keeping a close eye on the situation. And I’d advise you to do the same. It’s time to make a shopping list.

Back in 1986-87, Bank of America wrote off $1.5 billion in bad loans, wiping out its reported earnings. Analysts asked Sam Armacost, the bank’s president, where the problem areas were. Sam’s classic response: “Have you got a globe?”

That’s how it feels with today’s mortgage bubble finally popping. Problems seem to crop up everywhere, with a long list of financial firms taking a beating from subprime losses. It’s so bad out there that central banks around the world have been pumping tens of billions of dollars into the short-term credit markets.

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Okay, so we know it’s bad “out there…” and so does the stock market. That’s why the S&P 500 has tumbled nearly 80 points since the beginning of the year… and that’s why the stock market might continue floundering for months. But are financial conditions so bad that there is not one single stock to buy?

In the stock market carnage of 2000, for example, you could’ve picked up any number of oil and gas companies on the cheap. You could’ve bought REITs (real estate investment trusts), homebuilders and gold. These are just some examples. You didn’t even have to be particularly smart about which ones you bought. You just had to have the guts to put the money down and the patience to hang on.

Cheap Stocks for the Bear Market: Understanding companies

Sometimes it’s best not to try to predict where the market is going to go. My favorite investor of all-time is Marty Whitman, who runs the Third Avenue Fund. I looked back and read what Whitman wrote to his shareholders back in 2000. In April 2000, near the peak of the bubble, Whitman told his shareholders that the overall market wasn’t important. He criticized Tiger Robertson, a successful fund manager, for closing his fund. Tiger wrote to his shareholders: “There is no point in subjecting our investors to risk in a market, which I frankly do not understand.”

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Whitman responded: “If understanding a market means, as it obviously means for Robertson, understanding fluctuations in securities prices, then I can safely state that I’ve been in the investment business for almost 50 years and I still don’t understand markets — never did, never will. Understanding the market belongs to the realm of abnormal psychology.”

Instead, Whitman advises focusing on understanding companies and specific investment opportunities. The rest would take care of itself over time. And even though the overall market appeared to be in nosebleed territory, Whitman wrote that many common stocks were “dirt cheap.” Read on to discover three discounted stocks that could provide you with gains in the bear market.

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