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Wednesday, 19 September 2007

Recession-Proof Your Investment Strategy

by Ben Stein

Now for some vital news about what to do differently with your investments, as we may or may not be sliding into a recession.

In a word, buy (and keep buying) broad indexes of foreign and domestic common stocks.

Lunch Is on the Gunslingers

Here's why. Unless you're a short-term trader -- in which case you shouldn't pay much attention to my words at all -- you're looking for how your results will be in 10 or 20 years. Your results will be better if you have an entry point at which your cost is low. Your cost will be lower if stocks have been hammered by short-term traders selling out of panic because of a recession.

That's one of the few "free lunches" -- as my investment guru pal Phil DeMuth calls them -- you get from the stock market. If short-term traders allow you to buy stocks at a discount, thank them, take a polite bow, and go out and buy.

The short-term trader will bail out of stocks if there's higher unemployment, temporarily lower corporate profits, slowdowns in housing sales, worries about mergers and acquisitions, and fears about credit availability. That's fine -- it's what short-term traders on Wall Street do. They hope to be a fraction of a second ahead of the other gunslingers and make a buck that way.

Focus on the Future

To you, the long-term investor, all that is just static. You don't care about what corporate profits will be in the second quarter of 2008 -- you care what they'll be in 2018. The only reference to 2008 in your calculations is if that year's profit disappointments drive down the prices of the Dow, the Spyders, the EFA, or the EEM and allow you to buy in cheap.

The short-term player desperately worries about what the employment numbers are. You as a humanitarian are concerned about the well being of others and wish them happiness and prosperity. But if unemployment rises and stocks fall, you buy in at the lower price and show a handsomer gain by 2018 or 2028 or whatever your anticipated sell date is.

You have no interest at all in selling if employment falls. Why should you? It's irrelevant to you -- except, again, if it lowers your buy prices.

Buy in the Fall

What if the United States goes into a painful recession? Sadly, people will suffer. But stocks will probably fall. Typically, their absolute price falls and their price/earnings (P/E) ratio falls.

To put this as plainly as possible, this is a good time to buy stocks. The evidence is overwhelming and consistent that if you buy when stocks' P/E is below its 15-year moving average, you'll make far more money than you would if you bought at the economic peak, when P/E's are high. So, unless you're out of money to buy with during the recession, you buy. You don't go on margin to buy, and you don't re-mortgage your home to buy. But if you're employed and have money to invest, you buy.

Recessions in the post-World War II world are generally short; they end after about two quarters. Within about 15 months, stocks have moved from their last peak to their next peak. This is an average -- each case varies, but in every case the very long-term investor is better off if he or she keeps on buying through the recession.

Wait for the Morning After

I wouldn't try and wait until the absolute bottom of the downturn is reached to buy. No one can predict with any certainty when that'll be -- it's visible only in the rearview mirror. But if you've been reading this column for a while, you know that I urge you to buy every month and add more every month. Just keep doing that through the recession, if it comes.

I know you'll be scared. I know wild-eyed TV commentators will urge you to panic. Don't do it -- just keep on buying and wait. There's got to be a morning after, even if it takes years, and on that morning you'll be a happy guy or gal.

Lower prices because of sort-term fear are one of life's great gifts to the long-term investor. Don't look that gift horse in the mouth.

1 comment:

VenturSum said...

Ben Stein says not to sell when the TV commentators say we are entering a recessions. The masses will sell and the price of the investment will drop. At the same time Ben Stein says we should buy stocks when prices are at their lowest. However, if we keep buying at the start and during the recession we'll have less money available when prices are low. – He assumes that prices will rebound to levels higher than they were at the start of the recession, and that all or most of the companies will survive. Over the long term prices will be higher for companies that survive (time value theory of money). Consider the internet bubble, price never returned to where they were and many companies never recovered. – Instead, at the beginning of a recession, consider buying investments that maintain their value or even gain value during a recession (e.g.: gold and oil). Then at the end of a recession, when prices are low, convert those investments to stocks and equities. Chose those that are at their low point, have survived intact and show promise of real economic growth. – You'll have more cash available and your net worth will be substantially higher.

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