In part 1 of this series, I gave an overview of investing in a declining market. I said that there were two angles to approach this market; an aggressive capitol accumulation angle, or a conservative capitol preservation angle.

In this second installment, I'm going to get into more of the details of...

The capitol accumulation method
So how does the smart investor stay so calm in the midst of chaos? And what are these magical stocks that go on sale during the miserable time of a recession? Well first off, a smart investor knows that the economy won’t always be bad. Things will turn around... eventually. And if you are going to invest in an unstable market using the capitol accumulation method, you have to keep reminding yourself of that. And for those magic stocks on sale... pretty much all stocks go on sale during this time... the good ones as well as the bad ones.

The key to this approach is to find the good stocks that other investors are running from. Now many people will short sell stocks in this kind of market... and you can make a lot of money doing that. But I’m not talking about that style of investing, I don’t really care for it. I’m talking about good old-fashioned investing in, not against, good solid companies.

So, how can you invest in a stock during a recession and make money?
You have to think "long-term", or value investing. You can’t change the financial environment that we are in and make declining stocks go higher. To be successful, you have to be flexible and work with, not against, the declining market that we are in. To do that, you can’t be focused on tomorrow, next week or next month. That is too short-sighted in this market. When you mix a short-sighted mentality with a steady stream of negative returns on your stocks, you are likely to crack under the pressure and jump out your window. Don’t do that! You need to focus on what will happen to your stock picks once the recession is over, not what is happening right now. This leads me to the next point...

How do you pick these stocks?
This is where the real work comes in. You need to identify a few of the "best of the best" companies within given sectors and industries based on their fundamentals. Make a list of these stocks. You want companies with low debt, a history of steady growth, a history of strong earnings, and a low P/E ratio.

Here are my favorite (free) websites to do fundamental research:

Google Finance
Yahoo! Finance
Motley Fool CAPS
Morningstar Stocks

After you have your list of "solid" stocks, pick the one in each sector with the best looking fundamentals that is the farthest from it’s 52-week high. That’s the one you want to buy in a recession... a very strong company that is severely undervalued because of the bad economy, not because something is wrong with the company.

Now that you have your stock picks, here is how you buy them...
You don’t buy all shares of a stock all at once, you buy into each stock a little at a time. For example, say your restaurant stock pick is Darden Restaurants (DRI) [This is the parent company of Red Lobster and Olive Garden] and the current price is $20.00 per share. You decide that you want 200 shares of this stock. You don’t just plop down $4,000 and buy 200 shares at $20.00... remember, this is a declining market and the price is probably dropping.

What you want to do is, buy a few shares at a time over the next few months to a year. So you buy 25 shares at $20.00 right now. Four weeks from now, the stock is down to $15.00... you buy 25 more shares at $15.00. To see why you need to buy this way, lets say that you bought all 50 shares at the original $20.00 per share. You would have spent $1,000. But by slowly buying in increments, you have those same 50 shares for only $875.00! You keep buying shares like this, over time, until you have reached the number of shares that you wanted.

In a recession, you are actually buying stocks expecting them to go down in price... for a while. Once the economy pulls out of the recession, you are sitting on a pile of undervalued stocks that are going to skyrocket back to a price that matches their true value!

In part 3, we’ll tackle the capitol preservation method of investing during a recession.

Part 1 of this series

To read all of M. Taylor's articles please click HERE.

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