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By Jason Stipp | 03-15-2011 12:55 PM

Managing a Portfolio Through Market Shocks

Morningstar's Jeremy Glaser and Christine Benz offer investors some guidelines for assessing fundamental valuations and asset allocations during times of turmoil.

Jason Stipp: I'm Jason Stipp for Morningstar. With the Japanese markets booking a second day of steep losses and U.S. markets also dipping in response to that, I'm checking in with Morningstar markets editor Jeremy Glaser and Christine Benz, director of personal finance, to put some context around these global events and what it means for investors.

Thanks for joining me.

Christine Benz: Jason, great to be here.

Jeremy Glaser: You're welcome, Jason.

Stipp: So, Jeremy, I'd like to start with you. You used to be a stock analyst, so I wanted to get some insights about valuations, because certain factors will move the needle on a company's fundamental value and cause it to be worth less, but then there is also a factor of fear that's out there that's also moving the valuations around. So, as a stock analyst, if you were looking at some of these holdings, how would you start to get a handle on whether they are oversold or whether they are moving commensurate it with what the risk is out there?

Glaser: As is often the case, Warren Buffett has a great quote for the situation: That in the short term, the market is really a voting booth, while in the long term, it's a weighing machine. Short-term price volatilities are always going to be there. If people get afraid that there is going to be really much slower growth in the future because of this event, and that's going to really impact a company's earnings, you're going to see the stock sell off, just really out of fear that people just want to get out of the market.

But we hope over the long term that the market will really assess the true value of a company's earnings, the true value of their earnings potential, and that you'll get that fair value for it, you'll get that intrinsic value for the stock.

I think that investors, when they're looking at their holdings, need to think carefully about if the earnings potential for this company has been permanently impaired or even temporarily impaired. So, how does a particular company make money, where are their operations located, are they reliant on a lot of suppliers that might have been impacted by the events in Japan? And then think carefully about what the future demand for their products is going to look like.

So, for some companies, this event is going to very much impact their future demand curve. So, if I was someone like Shaw Group, who provides a lot of different types of materials and different types of engineering and construction help for the nuclear power industry, you're probably going to see a pretty different growth trajectory going forward, but if it's someone like Coca-Cola or even Toyota Motors, you're probably not going to see a really large change over time. So, certainly Toyota has a lot of operations in Japan--they are a Japanese company--but they also have cars around the world, and I don't think that the global demand for cars is going to fall precipitously because of this event.

So, thinking carefully about long-term earnings power, and not short-term noise, should help you get a better sense if the move is really just fear and market related, or if it's a true problem with the company's business.

Stipp: A quick follow-up for you. Certainly, we've seen a lot of volatility, and there is still a lot of uncertainty out there. So, when you're looking at the value of the Japanese market, for example, that value today isn't necessarily what that value will be after some of this uncertainty is cleared up. So, I think people tend to look at the stock price and say, that's what the stock is worth right now. But really that's kind of discounting a few different scenarios, right?

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