Roger Montgomery sees the current share market sell off as a good opportunity to buy into good businesses at a reasonable price. I tend to agree. The crux of his message in his article “Why is this downturn a great time to invest” is about investing in great businesses (Extract below):

“Businesses v Stocks

The January sell-off provides a timely reminder the stock market is where we buy businesses. The economic performance of those businesses tends to be much less volatile than their stocks. That volatility provides opportunity. Businesses create value by generating profits, retaining those profits and growing the equity on which they generate further earnings growth. The higher the rate of return on equity, the higher the profits for each dollar invested and the faster the equity can grow when profits are reinvested. And business with a competitive advantage can sustain high rates of return on equity for a long time and the earnings can continue to compound. Of course, in the short term – especially when short term fears replace long-term investing plans – share prices can disengage from the underlying fundamentals, economics and potential of a business. It is during these periods, investors should be sharpening their pencils because, eventually, the share price will reflect the value the business is creating through the process of generating and retaining profits.

Of course, it remains a fact that interest rates act like gravity on the present value of future cash flows. Therefore, each dollar of future earnings is worth less today when interest rates are expected to be higher.”

The full article is worth a read.