I just received this question from a reader of mine, Alan:

Hi Alan,

Well, like I keep on saying NOBODY can predict the market! If you attempt to do so, you are gambling. What is important is to know the true value of the companies you want to buy AND whether the share price is at a big enough discount to give you a margin of safety. When you are in it for the short term, the market is unpredictable and volatile. 50% of the time you will make profits, and 50% of the time you will lose money. The important thing is to make more money from the 50% stocks that go up and cut loss on the 50% stocks that go down.

When you take a 2-3 year perspective, the market becomes less volatile and 9 out of 10 picks will make money (if you follow all my qualifying steps). For example, blue chip heavy weights like Citigroup, AIG, Bank of America (BAC) and Boeing (BA) are $20-$30 undervalued. They may go down some more in the next few months. However, I know that ultimately, they will be valued at their true values. Which means that if I am patient enough, I will make 20-30% returns if I buy the stock and 80%-100% returns if I buy the long term Call Options (LEAPS).

So, personally, I don’t really know or care what will happen at the end of this month. There are arguments or both sides. Bears say that we will enter a recession because of 1) housing slump, 2) credit concerns, 3) falling dollar and 4) rising oil prices. Bulls say that we will rally because of 1) 2008 election year, 2) fundamentally S&P 500 PE Ratio is only 16.5 which means stocks are at fair valued vis-à-vis earnings and 3) a falling dollar will lead to increased exports and a narrowing of the trade deficit. In addition, a weaker dollar will mean that US companies will earn more profits when their foreign currency is converted back to US dollars!

If the market moves down, I will simply buy Put Options and take the ride down and buy more Call Options when we bottom out and start to climb again. In the meantime, I hold onto my 2 year Call Options because I am pretty sure my undervalued blue chip picks will eventually move up.