How to Invest During America's Financial Crisis: Strategy 2 - Diversification

Watching the financial reports on television over the past few weeks had put me in a fearful state. The crisis that America, and the World, face is beyond my personal comprehension, so I watch more. The more I watch, the less I understand. The fear and depression only increase.

The radio and television reports are so inundated with pessimism and panic, it is no wonder the stock market is in free-fall. How does one take advantage of this situation? Are companies that are valued three times their current price a good investment? Is there opportunity here? Yes, there is opportunity.

Consider the story of Sir John Templeton, founder of Templeton Investments. In 1939, the markets were in a similar panic because of World War II. Templeton made the decision to purchase shares in 104 companies whose stock was trading for under $1. He chose so many companies to ensure his diversification. He considered future earnings probabilities and swore to hold the stocks for a minimum of five years. Does this sound familiar to advice you have heard lately from investors and analysts such as Jim Cramer?

Of course, Templeton's investment paid off. But knowing that you can do it, and doing it are two different things. It will take courage and patience to buy shares in companies that are nearing bankruptcy, only to hold them for years as they wage war in these markets.

Where diversification is always important in your investment portfolio, this strategy calls for "mega-diversification". Going about finding 100 companies that you believe are going to ride out this turmoil and then thrive after it is a daunting task. I have used Scottrade's Stock Screener to develop screens that identify companies that have little or no debt, that have cash reserves, and most importantly, provide a service or product that I believe will continue to add value to people's lives.

Large Cap (10 billion or more in market capitalization) companies that have little or no debt are a good place to start looking for companies for further analysis. If a company relies on debt to do business, it may not survive the next couple of years. Consider Celgene Corporation (CELG). This is a biotechnology company that discovers and creates drugs and therapies designed to treat cancer and other diseases. Its two leading products, Revilimid and Thalomid, are used in the treatment of myeloma, cancer of the plasma cells.

Celegene currently has $1.2 Billion in cash reserves and a miniscule $23 Million in long-term debt. Not only is Celgene completely liquid, they also add value to the world. They are a company that should sustain performance through the downtrends and thrive as the country begins to pull out of its current economic state.

Within the past year, Celegene has traded in the mid-seventies. It is currently trading in the fifties. It has not been dessimated like many other stocks, therefore it may not have the potential upside as others. However, it does have strong fundamentals and creates value. With additional analysis, this may be a company to watch and a very good candidate for the mega-diversification strategy. You may read "A Mission Statement for a Solid Stock Trading Strategy" to learn more about my personal investing strategy.

It is difficult to conjurer courage during times of uncertainty. We must look at history to guide us, even though the world has never seen the markets and financial industry in such turmoil. History does teach us that the economy will rise again and the stock market will follow. It is not going to happen overnight. It is going to take many years to recover. Therefore, as Sir Templeton strategized, you must have the patience and ability to hold these investments for a minimum of five years.

Investing in individual stocks is only part of a larger personal financial plan. Read "Before You Invest ANY Money, Read This!" It is critical that you and your family meet several other financial milestones before you begin investing in the stock market.

Looking at today's market with optimism instead of despair, with a keen eye instead of a gullible ear, will greatly increase your peace of mind and your portfolio. By being prepared and having a financial plan you will feel better and experience more joy and freedom in your life!