Brace yourself

After deep share price valleys in almost every equity yesterday, the same shares are up 5-10% in one day--- all because of the anticipation of a full point shave by the US Fed. I wouldn't be surprised if the market slumps again sometime next week, particularly if there's any more bad news along the lines of Bear Stearns and the like.

My current approach has been to set limit orders for the best quality equities that represent the greatest discount to intrinsic value. If new cash for investment is short (and when isn't it? ;-) ), I allocate capital equally between shares that I already own that I rate based upon (in order):

1. Discount to Intrinsic Value. I do my own calculations by guesstimating discounted future cash flows and compare them to Morningstar's. They are usually pretty close although I'm guessing the model Morningstar is using is more sophisticated than mine. 20%+ discounts get my attention-- this would mean that the company would not have to grow earnings beyond their current growth rates in order for me to profit. example: LM's discount is now 50%. Try it yourself: DCF CALCULATOR.

2. Capitalization: No Debt or if in a capital intensive sector, a current ratio >2.0 and high free cash flows sufficient many times over to cover interest payments. This is the mistake I've made several times in the past, particularly in small to medium cap businesses that did not anticipate the storm coming and it wiped them out despite excellent products, profit margins etc etc. Buffet's favourite saying is, "When the tide goes out, you get to see who's being swimming naked". i.e. KMX, COLM, SEB, BBSI, AXP, DELL, CSCO

3. Committed Management with an excellent track record, double digit ROIC and ROE and high (>10% depending on the market cap) insider ownership. This folks will usually buy more when the stock drops, building in a floor for the share price. i.e. BAM, SEB, BBSI, AXP, CSCO. Notice how BBSI and SEB (both with >30% CEO ownership)'s share price has actually INCREASED over the past 2 months, unlike pretty much everything else, even the oil companies? The management's understanding and commitment to their business is unwavering. This is a strong endorsement for the shareholder.

4. I prefer companies that have a global footprint to take advantage of overseas growth, yet have US SEC oversight and are not so large that they are unmanagable. I quite honestly do not trust Chinese or Indian financial reports. They are only worth the paper they are written on. I prefer the businesses that I have part ownership of to be accountable to the US, where they will happily incarcerate fraudsters for 20 years when they inevitably get caught. This is in stark contrast to Canada, Europe and Asia where executives very, very, very rarely do jail time even after flagrant theft and incompetent stewardship of shareholder's hard earned money. i.e. BAM, COLM, SEB, COV, GSK, BMY, LM, COP, CX, DELL

I suggest that you do not buy on the fed rate cut rally. Wait until the almost inevitable--- Mr. Market will get depressed again and a great buying opportunity will present itself like yesterday.

When will this all turn around? I don't know. Hang tight and enjoy the ride.