Rational Blog

A Rational Blog for Irrational times

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So what will you do during a nuclear apocalypse? During the Cold War, I'd imagine myself sitting on my lawn chair, donning some shades, and watching the mushroom cloud from my front lawn.

Such a scenario is not a funny matter, but what the heck else are you going to do. I figured if I was going down, I'd go down cool.

Well fortunately we don't really need to worry about nuclear Armageddon today, but what about financial Armageddon?

What started out as a contained correction could turn out to be something much worse. Led by sub-prime fissure material, we are now truly facing what could be a global financial meltdown of epic proportions.

What is a Rational Investor to do?

For me, I'll take the same laissez faire approach mentioned above. No sense getting emotional over something that has been fairly easy to predict. In fact, I think I want to pop open a bottle of champagne.

The bargains that are being created in the wake of across the board selling are too good to be true. So many good companies are being sold in reaction to what is becoming mostly emotional selling.

Some of the most reviled sectors of today can be expected to be the biggest winners in a portfolio going forward. That means dabbling in the homebuilding, banking, mortgage insurance, and consumer retail industries.

My game plan will be quite simple. I want to own value and I want to sell excess.

I will scour the carnage and begin building a portfolio of undervalued companies that will survive and thrive no matter what happens to the economy in the short-term.

I'm very interested in the homebuilding sector where many companies now trade for very large discounts to book value.

Yes, I am well aware that book value is likely to be reduced as land values decline, but some of these companies are trading for 10% of book value. Even a 50% whack to book still makes these stocks historically cheap.

Following that line of thinking leads me to, you guessed it, financials. Banks are cheap no matter how poor the lending. In my opinion, much of the damage has already been priced into these stocks. The big money center banks in particular should be able to ride out this storm.

One of the most beaten down assets of late is the greenback. Frankly, I just don't get the selling in the dollar. Well, actually I do, but the logic of where we are trading today makes little sense. I want to own the dollar aggressively in any portfolio here.

That also means I want to be selling gold. The fear mongers shilling for gold will be reminded shortly when the rest of the world clamors to own dollars. A slumping world economy will be the trigger for this action.

On the short side of the market I want sell the excess of foreign stock gains. If the United States sneezes the rest of the world will indeed catch a cold. The concept of decoupling is far from reality.

The United States is the engine that turns the world economy. We have struggled of late and much of those struggles are priced into the market. My thesis going forward is that we are at or near a bottom with an upswing all but certain.

It is an excellent time to be buying all things American. The rest of the world has not yet corrected like we have. Put simply, I want to build my portfolio accordingly.

Timing is not important. Whether we go all in today or build our portfolio over time matters little. What is important is finding a bargain, making a commitment and sticking to it.

Keep cool. It may get a bit dicey as that mushroom cloud appears in the financial markets, but just remember there is little action today that can prevent the inevitable.

Wear those shades, pop open some champagne and get ready to buy some fabulously cheap stocks.

I'll have more specifics in my next entry.