When people want to buy a car, a new article of clothing, or some other good or service, they usually wait for a sale to occur. For example, say that you really wanted a new coat.  The price of the coat was $1,000, but you knew that there would be a 30% off sale in two weeks.

Would you buy the coat for $1,000 or would you wait two weeks to pay $700?

If you bought the coat now for $1,000, you are, in essence, paying an extra $300 for the ability to wear the coat before the people who wait for the sale. This can be said about many items (e.g. DVD’s, IPOD’s, etc).

It’s all based on supply and demand. When these items first come out, everyone and their mother wants to own them (e.g. high demand). When the demand is high, suppliers rush to capitalize on this demand. Later, prices fall and supply and demand reach equilibrium.

When it comes to the market, the case is a bit different. Let me explain…

When stocks (or real estate) go higher, it creates a sort of psychological mania in which most people (usually laypeople) want to jump in so they don’t miss out on the action.

On the other hand, when the market looks like hell many people run for the hills, and people become afraid. As we know, greed and fear drive the stock market.

Smart money usually takes a different approach and so should you…

When a market, whether the stock market, real estate market, or any other market, is artificially high for no fundamentally sound reason, you should not be buying. This is what the smart money does.

When a market, whether the stock market, real estate market, or any other market, is artificially low for no fundamentally sound reason, you should be buying. This is what the smart money does.

Smart money has been buying lately…

Insider buying was up 35% in February compared to the February of last year. Further, it was up 49% from two years ago. Moreover, selling has been down.

Much of the buying consisted of large capitalization stocks, including financial and tech companies.

Yours truly…

I recommended Citigroup(C) at about $28 per share on 1/8/08. Then I told you to average down and buy more on 1/24/08 at about $25, bringing our cost basis down to $26.5. As I write this article, Citigroup is trading just above $22. I suggest that you buy more. This will bring our cost basis down to around $25.5. Look at the one year daily chart for Citigroup:

Citigroup has a book value of $22.74 per share, so they are currently trading below their book value. Book value is the net worth of common equity according to a firm’s balance sheet.

With respect to Citigroup, for the year ending on 12/31/07, they had $113,598 million in Total Stockholder equity. They also had $4,995 million shares outstanding. If you divide Total Stockholder equity by the shares outstanding, you are left with a book value of $22.74 per share.

Book Value is commonly worded on Wall Street as what would be left for shareholders if the company were liquidated. I don’t want to rely on book value as a “floor” for Citigroup, but I do think that it is cheap here over the long term.

In closing…

There are both optimists, as well as pessimists, when it comes to the market. But you need to train yourself to buy good companies on the dips. Overall, this will provide you with superior returns.

I remember that I recommended CVS back on 10/17/06 at $31 per share. Then, I told you to average down at $29 on 12/4/06. This brought our cost basis down to $30. Take a look at just a couple of the comments that people sent to me back then:

1.    “Rare that someone has the confidence to stick their neck out! I for one really appreciate it, and I'm buying more CVS. DB”

2.    “You guys are my favorite free newsletter. I feel I learn more from you than anyone else. I appreciate your comments about the markets in general and specific stocks, such as CVS, in fact I just put an order in for 100 shares. Thanks also for your honesty and keep up the great works. Also I have never written to another web site to compliment them on their free service. Just wanted you to know that also. A reader who enjoys your newsletter. I imagine your paid services are great! Maybe some day when I have more income. Thanks!”

Now take a look at what happened to CVS:

I did not show you this to impress you. Rather, I showed it to you to impress upon you that it takes courage to do what is not popular. You have to be willing to buy good companies at good prices. You have to be willing to take some risk, and you have to get into the market when most people are too scared, and get out of the market when most people want to get in.

Be a leader, not a follower!!!!

Until the next time folks, spend your hard earned money wisely.