With the stock market in turmoil for the past week, I suspect many readers are wondering what to do. I believe in the conventional wisdom, namely do nothing. Invest for the long term and do not let the market's volatility drive your investment decisions.
Many have been predicting a market correction for some time. Markets never only go up (nor do they ever only drop). Between the low in March 2009 and the high a couple of months ago, the market (based on the S&P 500 index) gained 220%, and the recent market drop, notes CNN Money, trimmed only 11% off that gain. Gains like we have seen in recent years cannot be sustained without some down periods.
Bottom line: This is not panic time. Now is the not when you should sell and place your money under the mattress.
If you feel the need to take defensive action, let me recommend following the dictates of Benjamin Graham. Warren Buffett is famous for recommending a buy-and-hold strategy, but he learned this lesson from Graham, who was Buffett's teacher at Columbia University and his mentor.
Graham was perhaps the first great stock analyst, and his approach, known as value investing, recommended a very conservative strategy. For a stock to get his approval, he wanted to see lots of cash, a stock price relatively cheap when compared with per-share earnings, relatively low debt and strong sales, among other fundamentals.
In addition, he looked for a "margin of safety," which is the difference between the stock's price and the value of the underlying business. He wanted the stock price to be cheap relative to the business's intrinsic value to allow a margin of safety if unforeseen problems arose, such as an economic slowdown.
No question, Graham's approach works over the long term. In July 2003, I created a series of automated strategies based on the writings of some of Wall Street's great thinkers, including Graham. In the 12-plus years I have followed my Graham-based strategy, it has produced annual gains of 9.4% vs. the S&P's 5.4% annual gains over the same period.
If today's market turmoil has you on edge, let me recommend a few stocks that get approval from my Graham strategy. These are conservative investments, with solid financial fundamentals and well-priced stocks.
Universal (UVV): The company calls itself the world's leading leaf tobacco merchant and processor. It operates in more than 30 countries.
Genesco (GCO): This company sells footwear, apparel and accessories via a chain of more than 2,800 retail stores and leased departments. Its name brands include Lids, Journeys and Johnston & Murphy.
Reliance Steel & Aluminum (RS): In the fragmented metal service center industry, this is the largest player. Companies in this industry purchase metal products from metal producers and process them to customer specifications.
All of these companies have strong financials, are well managed and boast well-priced stocks. When my Graham-based strategy recommends a stock, you know it is a conservative investment. That is what you want in today's turbulent market.