Look for Margin of Safety

With all of the fear going on in the stock market over the last year it is even more important then ever to invest in companies with a high margin of safety. The near term future of the global economy is still murky. Nobody in their right mind can tell you when the bloodshed will subside. You will have a hard time sleeping at night if you have your money invested in a company with a weak balance sheet. Companies with large cash positions is vital right now. It is important because normally if a company gets in trouble they can sell of some assets for cash or they can issue their own stock. However, asset prices are so low right now that it is very difficult to turn a struggling balance sheet into a stellar balance sheet.

A company is not always safe just because it has a lot of cash on hand with very little debt. That can evaporate very quickly if a company is burning through cash. Although, I normally like to see a company put that cash to use via a stock buyback or an acquisition, I am very content for the time being to see a company hold onto their cash. An even worst case to see would be the cash rich company burning cash through their operations. At least when a company is using cash to make investments, that money does not dissappear. Cheap multiples are around everywhere. It is important, however, to limit your downside risk and look for companies that will have the ability to emerge from the downturn even stronger when the economy begins to recover.