Buying Long-term Stocks When the Markets are Down

History has proven time and time again that buying long term stocks when the markets are down has been a wonderful strategy. In fact the best times to buy have always been close to the market bottoms.

That is because when the markets crash they tend to take all stocks with them. This includes the stocks that really should have good long term value. This creates buying opportunities on almost every stock in the markets.

The problem is not all of these stocks are great buys. Some may actually be value traps, where they look like they have lots of room to go up only to fall down even lower. There are two types of value traps to watch out for.

The first kind of value trap occurs when a seemingly strong company gets beat up by the market and is trading at a cheaper price they it has been. Several companies such as Lehman Brothers and Countrywide became value traps this way and caused many bottom pickers to lose their shirt.

The second kind of value trap is when a company has been trading below the price it should be trading at for several years, with little or no attempt to move up. These stocks should generally be avoided due to lack of interest in the company.

There are 3 different things you can use to determine if a stock is likely to go up or if it giving you a false signal.

1. Is the company growing or have a new product coming out? If the company is not growing there may be little interest for investors to buy it despite it being undervalued.

2. Does the company have a strong cash flow? If it has a strong cash flow it is unlikely to go bankrupt and will probably be a better all around investment.

3. Has the stock stayed undervalued for a long time? If it has it is better to assume there is something wrong with it or there is lack of interest in owning it.

In general buying long term stocks when the markets are down has long term benefits as you try not to get caught in a value trap.