This time a year ago, the Dow Jones Industrial Average was just 8.5 percent below its all-time high of 14,165, Citigroup was trading above $32 per share, and the U.S. economy had recently expanded at the fastest annualized pace since September 2003.
Meanwhile, an overwhelming majority of Wall Street analysts, financial planners, and esteemed economists who were regularly appearing on broadcast financial programs last November were telling investors that the economy was in sound shape and that stock prices would continue to rise.
In other words, most of the so-called Wall Street "experts" were stock market bulls at this time a year ago, even though several valuation metrics clearly indicated at that time that stocks were selling at inflated prices while an overwhelming number of leading economic indicators suggested that the U.S. economy was headed for a significant slowdown.
Now, the Dow is approximately 41 percent below its all-time high, Citigroup is trading at less than $7 a share, and the U.S. economy recently experienced its worst quarter since the third quarter of 2001. Meanwhile, valuation metrics indicate that most investors are currently undervaluing equities and several leading economic indicators suggest that economic conditions in the U.S. will improve significantly during the coming year.
Yet, most stock market "experts" are now telling investors to invest in so-called "defensive" sectors of the market — in market sectors that tend to depreciate less in value than other sectors during economic downturns — and to allocate a significant portion of their financial assets to cash-like securities.
In essence, the same Wall Street experts who told investors a year ago to buy stocks when equities were selling near their all-time highs are now telling investors to sell stocks at a time when equities are trading near their lowest levels in more than a decade!
These supposed experts appear to believe in just the opposite approach to investing that's used by the world's most successful investor, Warren Buffet. They think its buy high and sell low, rather than to buy low and sell high.
Although I don't claim to know exactly when stocks will begin to trend higher for a sustainable amount of time, my research indicates that now is clearly not the time to exit the equities market. Rather, now is a time to buy stocks of well-run companies that have strong balance sheets and whose sales and earnings are expected to grow at a fast pace during the years ahead.
I therefore urge you to stop listening to the Wall Street charlatans and instead to do your own investment homework. One classic piece of advice is to buy companies you understand — the brands and names of businesses you see succeeding in the marketplace. That's a Buffett way of thinking.
Then, of course, you must do the serious financial analysis: For instance, the reported value of the assets on those companies' balance sheets should be considerably higher than the value of their liabilities. Also, review income statements and focus your investment considerations on the companies that have consistently generated a high margin of profit on each dollar of their sales revenue over the past few years.
If you're uncomfortable investing directly in the equities of individual companies and prefer instead to invest in a diversified group of stocks, you may want to consider reviewing some exchange-traded funds (ETFs) that can currently be purchased at attractive prices.
I recently recommended one such ETF to subscribers of my investment newsletter, The ETF Strategist, that I expect to double in price within the next 12 months.
Click here if you'd like to learn about that ETF and how to profit during both bull and bear markets.
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