Good Investment Ideas at the Bottom

 | Aug 06, 2013 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

axp

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wpo

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bp

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hpq

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goog

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aapl

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cmg

The investment industry has created an immensely profitable business machine from the act of dispensing investment ideas. Why not? That's the key ingredient we all want with respect to the market: stocks that will go up and up.

Many sources of investment ideas are worth their weight in gold and more, but I'm not here to brag or bash about any particular outlet of investment info. What I may deem useful may be absolute nonsense to the next person.

 I'm just going to flat out tell you what perhaps may be the best and by far the most pure, unbiased source of potentially great investment ideas. It's the one source where I've seen all the great investors pluck some very attractive investments for decades. I'm referring to the lists of stocks that are trading at or near 52-week lows, or lists showing the biggest percentage decliners in a given week, month or even year.

Name me any investor worth his salt and I can point to opportunities where that investor has pounced on a company after its stock price had fallen hard. Warren Buffett had American Express (AXP) in the 1960's and The Washington Post (WPO) in the 1970's to name a few. 

Sir John Templeton took a list of all the stocks that had fallen to less than $1 a share, bought them all and more than tripled his money in four years. Seth Klarman recently pounced on BP (BP) and Hewlett Packard (HPQ) after mishaps led to significant price declines. Bruce Berkowitz loaded up on financials when all you saw on a 52-week low list was nothing but financials. I could go on and on.

One of the strongest tools the best investors use is looking at battered stocks. There's no sophistication in it; it the same list of stocks is available to everyone. The difficult part is in the execution. Humans are wired to act emotionally and we prefer to buy when stocks are rising and avoid those that are falling. But the key to a successful investment outcome is the quality of the investment opportunity, not the quality of the company. You don't make money on Google, (GOOG), Apple (AAPL), or Chipotle (CMG) by simply buying them (although some people truly believed that is all you had to do). You make money by buying an asset -- any asset -- at the right price. At the right price, an inferior collection of assets can be a far superior investment than a superior asset trading at an optimistic price.

There is also a built-in safety mechanism in this approach, which is perhaps the most valuable characteristic of all. The best time to buy stocks is clearly when markets are in bear market territory, as was the case in 1974, 1980, 2001 and 2008.

The worst time to buy stocks is when markets are peaking. At the height of bull markets you will find very few stocks on a 52-week low list and by that point those on the list are there for a good reason. As a result, when the masses are buying during market peaks, the smart money is usually on the sidelines waiting for better prices.

Perhaps the market indicator should be not what analysts or economists say, but instead what the market says? Stay tuned.

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