As the markets are going down, nobody can predict with a 100% certainty where the bottom will be. Therefore a great tactic is to dollar-cost average into stocks of your choice. As a stock (for example Apple $AAPL) continues to go down you buy little bits on the way down so that your average cost for each individual stock is reduced.

Also, during times of crisis as we see today, would you rather hoard on toilet paper, or just buy the amount you need and save the rest. The rest that you save you can start investing into the markets at a slow pace. Historically speaking, the markets grow on average 8% a year, so these are the times to be smart with your money.

Look at one of the greatest investors of all time, Warren Buffett. He has been holding $128 billion in cash during the last years of the bull market. Buffett has been waiting for such a moment to start making investments. Warren Buffett looks at stocks using fundamental analysis. Essentially, he described a very basic DCF (Discounted Cash Flow) model during an interview when he was asked how he does it. A DCF model will show the value of a stock today depending on the financial statements combined with sector risk and indicated macro economic growth rates. The model can also show you the value of the stock on the terminal term (usually the 5th or 10th year, as the most models are a 5 to 10 year forecast).

I am sure Buffett is already stepping his toes into the waters as the average P/E (Price to Earnings) ratio has gone down to 18.16 from the high 20's. Looking at the last 150 years, we find that the average P/E of the S&P 500 has been 16, so technically there is still room that the markets will continue to fall to this key level. However, there is a problem with this metric that many investors and traders use, which is that the earnings season is not far away where companies report their quarterly earnings. As the price of stocks has gone down significantly, the quarterly earnings might still be relatively fine as it will account the prior quarter. This will lead to large P/E distortion as we saw during the 2008 crisis, where we saw an average P/E above 120 in May 2009. In simple terms, this means the company is 120x overvalued (if we are speaking of current equity value) on the markets, however, we always take into consideration future cash flows and here we can have a 5 to 30 year forecast of cash flows influencing the current price of a stock.

So, will you be buying stocks or buying more toilet paper with the current stock prices?


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