I tried to write a coherent article for this week, and that proved an impossible task. The stock market news has been historic and hysterical (as in not funny). So, I'm going to tackle some new questions about the stock market this week, as the questions seem to be flying faster than answers.

Q. Why did the stock market drop after the “Emergency Economic Stabilization Act” (bailout) was signed by President Bush?

A. This economic meltdown isn't going to react to wishes for instant gratification. The two answers I have to this questions are: 1. Can you imagine what would have happened if the Act didn't pass? 2. The markets were responding to the credit situation, a crisis that is far from resolved. When banks cannot loan money to other banks, they aren't going to lend it to businesses or individuals.

The loss of access to credit has caused many individuals to lose their homes to foreclosure and small businesses have been unable to obtain loans for the purchase of supplies or payroll. Hence, the unemployment numbers in September, which came to 159,000 (a little less than the population of Pittsburgh, PA). It was the largest monthly job decline in five years.

To answer the question, it will take time for all markets to regain confidence, as this credit situation won't be cleared up overnight.

Q. Should I get out of the stock market now, as Jim Cramer suggested?

A. If I did everything Jim Cramer suggested, I wouldn't have time to work or enjoy my life. And, I can't agree that it would be wise to sell everything when the market is down 30%+ from its peak. Selling now would be the worst timing. But, adjusting your long-term strategy because you can't stand the risk is another option altogether. Stocks now are approaching fair value after a decade or more of being overvalued.

So, for those with a long-term investment strategy in play, the current market dive is good news. If stocks stay down like this, you'll be able to buy more shares at lower prices. When the market does recover, your gains will be compounded.

But, Cramer makes an important point: I need to make sure I have some liquidity to handle bills, the mortgage and emergencies. How much? Unlike Cramer, I feel that if I have cash on hand for six months' worth of mortgage and bill payments and I'm still working, then that should be right for me. Your situation might be different, and only you know what you need to have on hand. Do you feel you may lose your job? Then, save more now for later. If you don't lose your job, then use that money to celebrate.

Q. Where do I invest now?

A. Did you know that on October 6th – the day the Dow fell below 10,000 for the first time since 2004 – four stocks actually hit new five year highs? And, eleven stocks hit new 52-week highs on that day as well (the four stocks with new five year highs were included in those eleven). Of course, new five-year and 52-week lows far outnumbered the winners. But, I was surprised at the winners – in fact, I'd never considered those stocks previously.

Shakeouts like this can reveal new winners for any portfolio. Before I invest, though, I'll do plenty of research. This research includes the P/E for each stock, or the price/earnings ratio. This ratio is found by dividing a company's price per share by its earnings. If a company has a P/E ratio of 20:1 (sometimes displayed simply as “20), this means that investors are paying $20 for every $1 of earnings.

Since a company's P/E ratio will fluctuate with perceptions about how that company will perform in the future, the market will make a judgment on their earnings prospects. If the economy stays grim, the P/E ratios may be distorted to the negative. Unfortunately, many stocks may look like they're undervalued right now, but only certain ones may be around to make profits in the future. So, I need to do more research into that company, that company sector and weigh information that concerns that sector and the economy in general against the figures before I invest.

The object of investing is to buy low and sell high. So, I wouldn't invest in the stocks that hit five-year highs on one of the worst days on Wall Street. But, I'll be careful about discerning between stocks that appear “cheap” and those that are, truly, undervalued.

Q. What is the silver lining in all this financial chaos?

A. The majority of individuals aren't active buyers and sellers. Many investors buy and hold for goals they want to meet, such as retirement or college or some other high-priced life event. Hopefully, over the next few years or decades, individuals will buy into stocks that hold P/E ratios that seem logical rather than over-speculated. If this is the case, then those investors may see some of the healthy returns that previous investors saw during the last two decades of the twentieth century.

And, think about this: You and I just lived through two Mondays in October where the stock market made history with downward movements. Maybe we'll live long enough to tell our grandchildren about this point in history, and – hopefully – it won't include the fact that we needed to live on noodles and butter like our parents did during the Great Depression.

Until Later,
Linda Goin