Financial Markets in Fear

07/23/2008 12:00 am EST

Focus: STRATEGIES

Tom Busby

Founder and CEO, DTI

I can’t think of a day that goes by that I am not asked the questions “When will the financial stocks bottom? When should I buy?” It is hard to avoid a direct answer.  What I want to say is “Looking to buy a bottom is like holding an anchor in your hands, with no chain, and jumping overboard.” You will find the answer…. but can you afford it?  Fortunately a stockholder actually knows the bottom, zero.  I look at the opportunity a bit different than most.  I suggest you invest in particular financials when the market begins to recognize their value.

I use a few rules for investing in financial firms during this historical time.

  1. Has the company addressed its accounting and mark-to-market issues?
  2. Has the management been forthright and open regarding issues or mistakes?
  3. Is the Board of Directors actively involved, giving appropriate oversight?
  4. Is the business model of the firm flexible enough to take advantage of economic recovery?
  5. Can I establish a point at which I recognize the market is valuing my judgment to the upside?

Honestly, I have no choices as of this date. Understand though, that we will have banks to deposit into, banks to borrow from and banks that are dependent on our overall economic strength. 

Looking at the financial firms I would consider a multi-pronged investment approach.  Consider bonds or securities issued by the firm.  Look for advantaged preferred stock positions. Anticipate the market with limited option positions.   Lastly, once the market begins to recognize the value…enter in on the equity side with eyes on the market and the firm. 

These are truly unprecedented times. No one can tell you what, how or when the financial markets will regain strength. I do know that investing in your education and market skills will give you an advantage as we move through these very turbulent times.

by Tom Busby of DTITrader.com

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