THE BENEFITS OF BAD NEWS
If there is one great investing secret that has stood the test of time, it is that recessions, depressions, and market calamities can offer investors their greatest rewards. Professor Jeremy Siegel of the Wharton School shows how beneficial rough times can be in his book The Future For Investors. Motely Fool's Rex Moore also wrote extensively about this in his 10-28-05 commentary, concluding that "depressions are good for you." Take for example, the mother of all calamities, the 1929 stock market crash and the Great Depression that followed. The Dow did not reach it's 1929 September high of 381 again until 1954! According to Siegel's research, anyone who stayed in the market after suffering the big losses and reinvested their dividends in more stock would have quadrupled their money in that same period. This assumes you only owned dividend paying stocks and reinvested all dividends in additional shares while they were low.
The Market was Bad, and That Was the Good News
Siegel's research points out that if the 1929 crash and Great Depression had never occurred, providing stable stock prices and rising dividend payouts, the results would have been far worse. Investors would have earned 60% less than what the dividend reinvesting bargain hunters actually accumulated over that 25 year time frame. More historic proof that when it comes to successful long-term investing, less is more.
Now the Bad News
Get ready for the great recession of 2006. Rising interest rates, very high oil prices, and slumping home sales are almost certain to trigger our next economic contraction. If history is any guide, when oil prices rise 50% or more, recessions are almost certain to follow. Consensus estimates are that housing now accounts for almost half of all economic activity. Real estate corrections can often last several years. There will be many ways to play this sector after it bottoms out, but meanwhile a long downward trend only adds to the probability for recession. It's time now to begin shifting into the kinds of stocks that generally prosper during difficult economic times.
"I PLAN TO STAY IN SHOW BUSINESS UNTIL I'M THE ONLY ONE LEFT" -
George Burns at 95
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