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Investor Psychology

A Strategy for All Times

This article was published in the July 2002 edition of Kiplinger's Personal Finance Magazine.

For the past 20 years, it's been very smart to "buy on the dip"--to load up on stocks whenever the market took a sharp tumble--because you could count on it to recover quickly and continue to rise. This worked after the crash of '87, during the slump of '90-'91 and during numerous market corrections in the years since.

But what if one dip is followed by another dip, and yet another, and the slump goes on and on and on--is this still a good strategy? I believe it is. But you've got to have the patience to stay the course, confident that quality stocks will continue to beat every alternative asset over the long haul, as they have for decades.

I'm 54 years old--old enough to have experienced the last long slump in stocks, and it wasn't pretty. When I was in college, in 1966, I saw the Dow kiss 1000, but it didn't cross that level again for another six years, until 1972. Then the U.S. economy struggled for a decade, with the Dow finally hitting bottom in August 1982. That bottom turned out to be a string of lucky sevens: Dow 777, the beginning of the longest, strongest bull market in history. Then and now. But these days, after a two-year slump in stock prices, a lot of folks wonder whether this new decade--the "aughts"--will turn out as badly as that long stagnation in stock values from '64 to '82. In my view, the odds are strongly against it, because of the enormous differences between the U.S. economy of that era and today.

Then, we were suffering from low productivity growth, hyperinflation, double-digit interest rates, excessive market regulation, high tax rates, trade barriers and lethargic corporate governance. American global competitiveness was eroding, not ascending, as it is today. No wonder stocks were in the toilet. By comparison, today's American economy, despite its recent woes, is a marvel of efficiency, innovation and openness--the model that the rest of the world seeks to emulate.


This magazine has been giving encouragement to fainthearted investors since the day it was founded, 55 years ago. Stocks were a very difficult sell then, even though the economy was booming after World War II. Our first subscribers were young adults who had come of age during the '30s, and many of them had seen the pain inflicted on their own families by the crash of 1929 and the ensuing depression. No wonder they shied away from owning stocks.

A 1949 survey by theFederal Reserve Board asked consumers what they deemed to be the "wisest" investment vehicles. Their choices: savings bonds (60%), bankdeposits (32%) and realestate (9%). Stocks came in dead last, at only 5%. Lest you think the respondents were only unsophisticated folks, consider this: Fixed-return investments were deemed the best by 67% of the high-income respondents, too--those with more than twice the median household income of the day.

But our new magazine preached the superiority of stocks to this reluctant audience--and not just any stocks, but growth stocks. Many of these companies paid no dividends, unlike the railroad and utility stocks beloved by the small number of Americans who owned stocks at all. Our growth picks back then? Innovators such as IBM, General Electric, DuPont, 3M and Black & Decker.

Early on at this magazine, the editors crafted a distinctive Kiplinger approach to investing that persists to this day.


Buy quality stocks and patiently let them grow.

Avoid the temptation to trade actively, buy on margin or use speculative techniques you don't understand.Invest on a regular basis, with dollar-cost averaging, and do not engage in market timing. Put no money into stocks that you are likely to need in the next five years, because, as reliable as long-term returns have proved to be, stocks are very risky in the short run.

Question public euphoria and pessimism, because neither lasts forever. Buy a stock for only a modest premium to the realistic annual growth rate of the company's profits (say, a price-earnings ratio of 20 to 25 for a company whose profits are increasing at a rate of 15% a year).

Use mutual funds if you aren't interested in learning smart investing techniques yourself, or if you can't achieve enough breadth of holdings in a small account.


Diversify broadly. Now, mind you, this is just our strategy for investing in stocks. It doesn't speak to the whole issue of asset diversification, about which we are equally passionate. As much as we favor stocks for long-term investing, we also believe that the volatility of stocks must be balanced by significant holdings in bonds and cash that are appropriate to your age, wealth and tolerance for risk.

Our subscribers who followed our advice and stayed on track through thick and thin have prospered over the decades. We know, because we occasionally hear from some of them. We think it will work for you, too.