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If you’re an investor in Scotts Valley or San Lorenzo Valley, you probably haven’t enjoyed opening your account statements the past few months. Many of us have had front-row seats for the tech boom and bust and watched our portfolios’ values increase and decrease often, and yet it can still catch us off guard. 

In January alone, the Dow Jones Industrial Average fell 4.6 percent. And since the Dow hit its all-time high of more than 14,000 in early October 2007, the index has dropped a bundle, with huge losses coming this past week after the further collapse of the financial sector.

At this point, you probably have at least two big questions: What’s causing this market instability? And how should you respond?

Let’s start with the first question. What forces have caused the market drop? Here are the chief culprits:

• Looming recession: Leading economic indicators suggest a significant slowdown in growth. For example, the unemployment rate has risen dramatically. Since 1949, we haven’t seen such a big rise in unemployment without a recession.
• Subprime loan crisis: As you know, the subprime loan crisis has been in the news for months. First, the problems with subprime loans hit the real estate industry and the financial services industry. But now, the subprime crisis may have spread to the extent that consumers are being forced to pull back from spending.
• Decline in international stocks: As a huge part of the global economy, the United States is far from immune to what’s happening in foreign stock markets — and many of those markets are down between 20 percent and 30 percent down over the past several months.

In a nutshell, those factors have helped lead to the stock market decline. Yet, as an investor, you have opportunities right now, because many stocks have already fallen 25 percent to 30 percent. And the decline in stock prices has also meant a drop in the ratio of share prices to company earnings (“P/E”). In fact, right now, the price-to-earnings ratio is pretty low, by recent historical standards.

In plain English, this means that stocks are now relatively cheap. And yet, strangely enough, investors often stay away from the market when stocks are valued attractively and only jump in when it’s more expensive to buy.

Consider this quote from Warren Buffet, perhaps the world’s most famous investor: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well. The dumbest reason in the world to buy a stock is because it’s going up.”

So, if you have room in your portfolio to add appropriate investments, look for those opportunities now — but don’t buy investments today that you would not want to own in a recession tomorrow. If you are already fully invested, with a diversified mix of quality investments, have the courage to be patient and do nothing. (Keep in mind, though, that diversification does not guarantee a profit or protect against a loss.)

If you’ve created a long-term strategy — one that is suitable for your needs, goals, risk tolerance and time horizon — stick with it. Bad times don’t last, but smart investors do.

Zach Brown is a financial adviser for Edward Jones Investments in Scotts Valley. He can be contacted at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Comments (1)

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Another Dumb Warren Buffett quote doesn't make good investment advice by itself
written by An Active Investor, September 23, 2008

Yea, P/E ratios are historically low, but stock prices, even when you try to compute Price-to-Book, are a big unknown right now. The recession isn't even really here yet, and corporate america is missing their earnings left and right. Even the analysts who get paid megabucks to follow these companies and spend all day researching them are getting their S**T blown away by the earnings and revenue misses. It happened in Q1, and in Q2, and Q3 is shaping up pretty much the same way. FINALLY, companies are warning about a decline and a slowdown.

So what does this all mean for P/E ratios? Well, if the E part is an estimate (which it is) and everyone -- even the experts -- keep guessing TOO HIGH -- which they ARE doing -- then the P/E ratios are OVERSTATING the value of the stocks right now. DON'T BE A SUCKER! Just wait it out for a little while. It's not time for bargain hunting yet. The environment is toxic unless you have a decade or more to recover from any further losses you will suffer jumping in right now.

The Dow is going to go below 10,000 before this credit mess is all over, I guarantee it.

** CONSULT YOUR OWN INVESTMENT ADVISOR IF YOU HAVE ONE WORTH A D*MN **

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