After the Carnage: Bargains and Opportunities in 2009

America has to rebalance its economy and shed its bad habits. The agony won't last forever

By Peter Coy

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Who wants to think about investing at a time like this? Your large-cap stocks have become microcaps, your triple-A bonds are suddenly triple-C's, and your home's value is so deep underwater you need scuba gear to get in the front door.

Wait—there's hope. Contrary to appearances, the world is not coming to an end. What we're living through is a painful, protracted, but ultimately healthy rebalancing. For years, Americans overindulged—borrowing from the rest of the world and each other to pay for faster cars, bigger houses, and smaller cell phones. China underindulged. It suppressed consumption, grew through investment and exports, and accumulated a trillion-dollar war chest of U.S. Treasury bonds and mortgage-backed securities. For a while the codependence seemed to benefit both sides, but it was profoundly unstable. And now the edifice is crashing down.

In the new equilibrium, whenever it comes, the U.S. will return to its productive heritage. It will create goods and services that the rest of the world wants instead of paying for imports with IOUs. China and others will devote more of their awesome productive capacity to raising the living standards of their own citizens. If all goes well, global growth will get to a more stable footing.

EXTREME RISK AVERSION

Now there's just the small problem of getting from here to there. Lots of investments that seemed like sure things will be worthless in the new order, while new investment opportunities may be slow to surface. Unemployment is soaring because workers are being jettisoned from such once-booming industries as retail and finance that may play a smaller role in the economic future.

Nobody ever said that creative destruction was pretty. Writes Brad W. Setser, a senior fellow at the Council on Foreign Relations in New York: "Those who bet that an unbalanced global economy could sustain high valuations for risky financial assets have lost large sums of money. In the long run, the challenge will be to find a more sustainable basis for global growth."

For investors, the long run is precisely the thing to focus on. You've probably already lost a lot of money. Don't lose more by joining the stampede of buy-high, sell-low market timers. Risk aversion is so extreme that good stocks and bonds can be had for ridiculously low prices. And there's a huge penalty for going all hermit-like and seeking maximum safety.

In other words, you can do well by buying what's out of favor. Case in point: A diversified portfolio of U.S. junk bonds yields more than 20% a year. If there were no defaults (granted, unlikely), you could double your money in less than four years. For comparison, how long do you think it would take to double your money on Treasury bills if they continue to yield 0.01%? The answer: 7,000 years. Assuming, of course, that the human race exists for that long and your heirs can be found in some distant corner of the Milky Way.

BLOOD IN THE STREETS

Today's prices are bound to look cheap within a decade and probably sooner, unless the global economy goes into a long and severe depression, in which case we'll all have bigger problems than the composition of our 401(k)s. While a blinkered buy-and-hold philosophy doesn't always pay off (it has been disastrous for anyone who began accumulating stocks in the past 10 years), it's a proven strategy for times when prices are unusually low and yields are exceptionally high—as they are now. For a deeper look at this theme, see the essay by Christopher Farrell on page 46.

That's not to say that you can throw darts at a list of stocks and expect to hit all winners. So BusinessWeek writers set out to find the most promising investments—and the ones to avoid—not just for 2009 but for the next five years. They share dozens of their findings in the following pages.

The common theme is profiting from panic by acquiring underpriced assets that others have abandoned, à la Baron Rothschild, who advised investors to buy when blood is running in the streets.