Before you figure out how much to buy, knowing when something is on sale is the first step to a purchase.

15% Off, or the Buy-One-Get-One-Free Special? 

When you go to the supermarket, you're looking for the specials on sale. You know, for example, if you wait long enough, that your Frosted Flakes go on sale every two weeks or so.  You could use the $1.00 off coupon that they leave in between, but you know the better deal is when the price is cut in half by the buy-one-get-one.

Stocks are no different than shopping for Frosted Flakes in terms of your desire to get a good deal.  You're trying to buy your Frosted Flakes for half off.   In the investment side, that is called buying at a discount to the Fair Market Value (FMV) or the worst case-FMV.

Morningstar shows you a pretty good estimate of the FMV. You can also get them from places like Standard & Poors, your broker's reports, etc., and compare them. I trust Morningstar's numbers unless there is some huge deviation.

Still, many of you are pessimists by nature.  There could be hidden stuff that we don't know about this company. It could affect FMV. Morningstar even says that this is possible, right?

Right. So don't get anxious. Get out your red pen. 

Take ALMAGMATED GREED (AG) my made-up stock.  It has an FMV of $48. Now say  HEY! I don't believe that. (Go ahead, you know that you want to). Bad news is going to rain down on this company like an afternoon in the Amazon. 

You can, just for your own thinking, say that Morningstar and all of the other expert analysts are dead-bang wrong. It's been known to happen a time or two. So whack down their number to a worst-case FMV number that makes you happy. 

Make the radical assumption that the company is worth half of what Morningstar says it's worth, although they tend to be pretty on the money.   Say that AG is only worth $24 of FMV.

Comparing Your Worst Case to the Stock's Floor

All stocks have a floor. There is a discount-to-fair-market value limit.  If the stock has a  FMV of $48 and the lemmings have beaten it down to 13.00, the stock is trading at 72.9% discount to its FMV. Even to your worst case of 24 FMV, the stock price is still a 45% discount. As I've mentioned before, financial gravity pulls stock prices up or down from their highs and lows back towards that FMV.

Is there money to be made at a 45% to a 72.9% discount to FMV in the price of the stock? That depends on the company. 

If you're buying FROSTEDD FAKES you might give that one a long, hard look. The stock market's history is filled with small-cap generic companies whose bones inhabit museums (Remember PeaPod.com). On the other hand, if this is Countrywide Financial, which writes 1 in 5 loans in this country, you are looking at a different animal.

What would happen to all financials if one of the largest companies in America writing and servicing home mortgages goes belly up?  A disaster that would be a financial Tsunami.  Other companies and even countries would go well out of there way to help avert such a catastrophe.  Look at the $2B buy by Bank of America into Countrywide. That is not only a vote of confidence, it is a buying opportunity by BAC into cheap assets.

Most large cap companies do not trade much below 70% of their FMV for very long. Once whatever bad news has been processed and digested, they tend to gravitate back towards their FMV numbers.

If you hold the stock short term, you can still lock in 10-25% gains as it grativates back toward its FMV. If you have the self-discipline to hold the stock as it moves through the years, and you should only be picking companies with the ability to grow that are great companies if you're following my method, then you can make substantially more.

When bobbing around looking for opportunity like a shore bird though, you need to pick out the good fish from the bad.

The best types of fish in murky water are big, shiny, and significant. You have to use the "Are they going to go out of business tomorrow" test. If you can determine that, say, General Motors or Citicorp is not about to go out of business tomorrow, that their dividend, if they pay one, is largely not on the chopping block, and that the world is not quite as cataclysmic as CNBC shouting FIRE!!! loudly would suggest, than you should buy. 

Now the "how" of placing your order comes into play. 

Why the NYSE isn't Costco

Buying stocks for value is more like shopping at Albertsons/Safeway/Publix/Your Market That I Forgot To Mention HERE than it is like shopping at Costco.  It is often unwise to buy in bulk.

If you only have enough to buy 100 shares, you have to research the stock, look at the opportunity to buy, and decide whether today's price is a good enough discount to the fair market value of the stock to make you happy. The stock may go down a bit further, or up, but you have to pick some commitment point.

For those who have a bit more to invest, and can buy several hundred to several thousand shares, you have to think shore bird. They wait for the swell to drop, then pluck up something, watch the swell rise a bit, position themselves, and pluck up something again.

Last week's market has been the perfect illustration of why shore birds make great value investors. The market's tide went positively white cap, rising and swelling on the storm of fears of this sector slowing, or that bank having exposure to more of the sub-prime mess.

Discount broker fees are pretty cheap these days. It does not eat into your profit on a 52% rise to spend $7.99 or $12.99 a few times to get the right price.

None of us have crystal balls. You buy at what looks like a good price on the day, and the next wave the following week may dip a bit lower. You might buy a bit more.  You will start to notice the financial ocean floor's pattern, though, as you check the price every day. There is a resting pattern. You can be pretty sure that, barring the CEO having packed several billion in his suitcase and fleeing to Tehran, you aren't going to see much more drop in the floor price of most mega-companies that get hit by bad news.

You might end up with a bit at 18 a bit at 15, and a bit more at 13. Again, even if you half the FMV in this example to 24, you have locked in gains of 25% or better. If you work with the real world, and the stock moves into orbit around its full FMV of 48 you've  captured a 50% or better gain.

Time window is the other piece of this formula, which is where the courage of your convictions comes in...

The Courage of Your Convictions

Value investing is the financial martial art of self-discipline. For those old enough to remember Kung-Fu, you have to grab the red hot cauldron with both arms and carry it across the room, even though it's burning.

There are days, when you buy into stocks being hammered by the lemmings that some of your picks are going to drop. Sometimes they may drop 5%, other times they may drop another 15-30% depending upon when you got in, and further news on the company that leads to blind lemming panic.

If it goes down, and you can afford to buy a bit more, you might, as long as it stays a small part of the great Harmony that is your portfolio.  The additional buy can have both a profit and a calming effect. It offsets any loss if the stock returns to FMV more slowly than anticipated.  

Don't buy to excess. A harbor full of many boats rides the tides and tempests better.

Particularly in these tough weeks, it is hard to watch some of your stocks that were in positive territory retreat back to negative territory.

At this point, a deep breath, and some analysis.  If you look around, what do you see? Are companies buying back their own stock?  That's usually a good sign that they think their shares are as cheap as you think that they are.

When you go out to dinner, is the parking lot packed, or a ghost town? When you go to the grocery store, is the guy in front of you pulling out two items or a cart-full?  Is the gas station still reasonably busy despite $3.45 gas?

Chances are, even if the CNBC talking heads are running around with the fire engine lights and Mara Bartiromo clanging the closing bell wearing an "The End is Nigh" t-shirt, the real world is stil okay.

Most companies that get nicked in some financial problem or corporate boondoggle have to clean up their act or at least put on the face of a house-cleaning to end their problems. Stocks should be going lower six or seven months before the bad news breaks, but that never happens.

Some companies stall. Kodak died on its lack of vision. Some companies take a longer time to turn-around. Long-term DELL and Oracle shareholders know what I'm talking about.  Usually, though, if you pick up a stock of a solid company in a crisis moment, even if its momentum isn't great, you can still sell the stock for a tidy 15-25% gain from the low where you bought it.

So enjoy someone else's fear and misery, and stay the course. If you can say Citi under Robert Rubin this week is better than the Citi that tanked itself last week, then you invest with confidence that this or any other company in similar circumstances will track better into the future, and that you have benefited from the irrational pessimism of the short-termers grinding a different agenda in the marketplace.