Buy Bear Stearns? For Long-Term Investors Only

Deciding how to trade Bear Stearns and other financial giants on a day when the bottom seems to be falling out of the sector depends largely on your investment goals.

Long-term investors are in a better position to weather the storm of doubt that has come with the move by the Federal Reserve and JP Morgan Chase to provide emergency funding to prop up Bear Stearns, analysts say. Bear said its liquidity had deteriorated rapidly in the past 24 hours, and its shares have lost nearly half their value today.

Investors need to weigh their appetite for risk and look long and hard at Bear and the other financials before deciding to make a move.

"In most cases you usually do not sell on a day like today. You let the dust settle, see what's going to happen," said Nadav Baum, managing director of investments at BPU Investment Management. "The problem with making a decision today is you're making that decision based on fear and greed."

"The trading mentality goes in and buys the stock today," Baum continued. "The long-term investor mentally says, 'Wait a minute, let me understand why the stock is down and then I'll go in and make a decision in the next two or three days.' The scared investor usually sells the stock today."

Baum likes financials, but prefers the money-center banks to the brokerages. He recommends JP Morgan and Bank of America because of their dividend yields.

"The question really now becomes, especially for Bear Stearns, whether it can remain an independent firm," said Michael Kresh, president of M.D. Kresh Financial Services. "You're dealing with a big unknown. If the chief financial officers and the heads of these firms don't know what they're holding themselves, how can anyone from the outside draw a valid conclusion?"

Kresh said long-term investors can afford to poke around financials for bargains, but advises avoiding Bear Stearns and most of the others because of the likelihood for volatility in the coming weeks and months.

"Somebody who's close to retirement, you should not be loading up on them to say you're getting in cheap, because we' don't know how cheap cheap can be," he said.

Peter Miralles, president of Atlanta Wealth Consultants, recommends that those who own Bear shed some of their holdings, but he also is examining points of entry for other financials.

"As far as Bear Stearns goes, you've got some losses that could turn into bigger losses, so to mitigate risk you take some off the table," he said.

Kresh advises extreme caution all around, especially considering the precarious connection in recent history between Fed moves and the fate of large financials. The Fed caused a major spike in the market earlier this week after announcing an expansion of its term auction facility liquidity efforts, and has been cutting rates aggressively since September 2007.

"In all those cases the stocks that bounced up the most were the financials, yet within a few days thereafter they started to unravel again. That suggests we do not know what the underlying problems are yet," Kresh said. "Investors have to be very, very patient to get through this, because it could be six months to a year until we actually see the bottom."

© 2009 CNBC.com