A Sub-10k Day

I woke up this morning and turned on my laptop, ready to face the day and catch up on the news from the East coast. MSN Messenger started up and on the news of the day pop-up thing that comes with it, I was stunned to see a headline about the Dow falling below 10,000 points.

Immediately I headed to Google Finance to check out what the heck was going on. By mid-day the Dow, NASDAQ and the S&P 500 were all past the negative 8% mark.

But since Congress passed the bailout bill, we should be rebounding in the markets, right? Not exactly. The bailout was designed to prop up banks and support the broader economy. It was created to avoid depositors running on the banks in a mass account withdrawal. It was not intended to boost the individual prices of individual stocks. Ebay's income statements and business fundamentals haven't changed because of the bailout.

The 10,000 point mark is "psychologically important", according to many economists and financial experts. The last time the Dow was at 10,000 was in March, 1999, when it was on its way up. 10,000 points itself doesn't mean much. But since it's been 9 years since we've been at this level, it does show that our progress since '99 wasn't sustainable at that rate.

Remember, this mess was created because of a bubble in the housing and mortgage industry. Eventually bubbles pop. Markets correct themselves.

It was a painful day in terms of my own holdings. Fortunately I own not just basic shares, but other somewhat tricky market things like options - more importantly, put options. In a very brief explanation, that means I can still make money even if the share price drops.

What does today mean for the average investor? Well, the broader markets rebounded in late afternoon trading today, making their way back towards a less frightful -3.5 to -4.3% range. Individual stocks rallied, with some ending up in positive territory on the day.

This simply goes to show that the market can be a wild beast. Trying to time the market bottom is virtually impossible, as I wrote about in this previous blog. An investor's best bet is to take some time finding companies with a sound business plan. Look for companies who have produced solid earnings growth, year after year.

In times like these, take a look at dividend paying companies like Johnson & Johnson (JNJ), Coca-Cola (KO) or Enterprise Products Partners (EPD). All three of these companies have at least a 2% dividend, paid each quarter. While all three are not immune to a broad market downturn, dividends can be a nice way to offset the selloff, especially if you re-invest them. As always, this isn't necessarily a recommendation to run out and buy these three companies, but perhaps taking a look at their cash flow and income statements wouldn't hurt.

Regardless of the broader market and the current recession, there are a great many companies in the world who operate solid businesses and manage to make money year after year. When companies like these get swept up in the turmoil of the greater market, it creates opportunities for investors like us who understand it won't always be like this.

Take a breath. Realize it's not the end of the world. McDonald's (MCD) won't go bankrupt anytime soon. Look for the value in good businesses and invest with confidence for a brighter day.