I don't do a lot of predicting about the market direction. The market doesn't matter. What matters is whether you are buying wonderful businesses and what price you are paying for what you are getting. But the question keeps coming up about how far down this market can go before the bottom.
In the last 100 years, the market has gotten into single digit PE ratios at least once per decade in 7 of the last 11 decades. We were there in the 70s repeatedly, and the last time was at the beginning of the 80s when I started investing. Then double digit PEs for almost 30 years.
So of the 4 decades when the market sustained moderate to high prices in the last 100 years, 3 of them just happened. But now we're right at the bleeding edge of sliding into single digits on the DJIA. So this is a kind of historic moment. For the first time in over twenty years, we're starting to see very good businesses go on sale big time. This is when great investors in the Rule #1 tradition load up the truck.
I've been telling you to wait. To stay in cash. To protect yourself by being very careful about valuations. You've been doing good. You're ready. Now is the time to begin consuming great businesses.
Can the market go down some more? Yes. In fact I think it is likely. But for us, that is a good thing. Let me show you why. It's all about valuation. If I sell you a business for $10 that has a solid value as a business of $20, did you get a good deal? You just bought $20 for $10. You got a good deal.
If, next month, I sell you more of the same $20 business for $5 did you get an even better deal? Yes, because you just bought $20 for $5. Did that make your first investment a bad one? No. It's still a fantastic investment. But your second opportunity was even better. And then if I sell you the same $20 for $1, are you now sick that you bought it earlier for $10 and $5? No. You better not be. You stole it both of those times, too.
What I'm showing you here is the way great investors have been investing for the last 100 years. It is as foolproof a way to make money as exists on this planet, IF you know the value of the thing you are buying. That is a big IF. But assuming you do your homework correctly, when you buy you should hope and pray that the price continues to go down even more.
I know that's not intuitive, but it is right. The reason it's right is that you are not a seller of stocks. You are a buyer of stocks. That makes you a consumer. If you are consuming something, anything, you don't want price to go up, you want price to go down.
You Rule #1ers who know what you are doing now have my blessing to begin consuming. And then let's hope the market for your investments drops like a brick so you can buy a bunch more at even better prices.
Rules: Never invest unless you are solid on the value. And let's not exceed 25% of cash in any one thing for the time being.
Now go play!