Buying Stocks During Volatile Times

Investors who do their homework can profit from uncertainty in the stock market. You can do it, too.

In uncertain economic times, Wall Street can look like a scary place. Your favorite index might gain five percent one week, only to lose it all on Monday, and drop even further before the weekend. Many investors run for the exits until the markets settle down again.

But they're missing out on some great buying opportunities.

The basics

The trick to turning difficult times into an opportunity rather than a problem is simply this: do your homework.

You're looking for great companies, the kind that will weather any storm and come out on the other side, smelling like roses. Build a diversified portfolio of these winners, stretching across different industries and market caps, a couple of continents, and maturity levels from the young and promising to the proven veterans. It doesn't need to be a truckload of different stocks, but certainly more than a handful. That way, you're still okay if one or two of your choices don't work out, while the good picks get an opportunity to shine.

Picking your stocks

Here's how you can identify the brilliant businesses that can shrug off times of hardship while the competition begs for mercy.

• Solid financials. A strong balance sheet with lots of cash and little debt will help any company get through the occasional loss or negative cash flow. Consistent profits and positive cash changes, on the other hand, help the company keep that cash in the bank. Good numbers mean low risk, come good times or bad.

• Solid business. You want rock-solid management with a sound business plan, and it's best to avoid market sectors facing serious long-term headwinds. At the turn of the millennium, it was easy to find flimsy dot-com businesses. But it was better to buy them a couple of years later, after the bubble popped to sort out the winners from the losers. More recently, banks and biotechs have had their own unique problems. Look elsewhere until those sectors hit rock bottom.

• Solid discounts. The idea is to find great companies at a discount, as the problems on the broader markets tend to drag down share prices on good and bad companies alike. You've identified your target stocks already-now wait for a good buy-in price. Volatility can be your friend if you're patient enough to wait for the downswings. Just remember that you need solid financials and solid business, too. Some stocks deserve to be cheap, after all.

Wake up and smell the coffee

Wild market swings can be scary, but Wall Street has always recovered from even the worst of its many crashes. Buying great companies in the dark of night will make you rich when the day breaks anew. If everything in your portfolio comes with solid financials, business, and discounts, you'll be one happy camper in the morning.