Value Added
How to Invest in 2009
The worst bear market since 1937-38 has crushed investors, top fund managers and market strategists. Here's why I still think it's time to hold your stocks -- or buy more.
By Steven Goldberg, Contributing Columnist, Kiplinger.com
December 23, 2008
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There has been no place to hide in this, the worst bear market since the 1930s. Precious metals, oil and gas, real estate, foreign stocks, small stocks, large stocks-they have all been pummeled this year.
Some of the best fund managers of our time have had their heads handed to them. Most notably, Bill Miller, manager of Legg Mason Value Trust (symbol LMVTX), which beat Standard & Poor's 500-stock index a record 15 years in a row, has lost 57% through December. 22. Longleaf Partners (LLPFX), one of the most storied value funds, has plunged 47% over the same period. Dodge & Cox Stock (DODGX), another value fund with a very long and very good record, is down 40%.
What did the managers of these funds do wrong? I think they became too conditioned to buy the dips. Buying stocks that are tremendously out of favor with most investors-stocks that look cheap -- has long been perhaps the most successful strategy in investing. But it didn't work this year -- certainly not with companies such as Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual either failing or coming close to doing so.
Similarly, some of the best market strategists have been dead wrong. Steve Leuthold, who heads the Leuthold Group, a Minneapolis-based investment- research firm, has been a top market prognosticator for half a century. But he turned bullish this year, just as the market began its freefall. Like Leuthold, Sam Stovall, chief investment strategist at Standard & Poor's, spends a lot of time looking at market history in making his predictions. He, too, turned bullish when he should have shouted "Sell!"
I haven't been a hero to my readers this year either. I thought the market had hit bottom several times -- when it was just beginning to fall further. As the market fell more, I became increasingly sure that prosperity for stock investors was just around the corner.
What went wrong? Historically, when investors are panicked and the Federal Reserve is aggressively lowering interest rates, the market is ready to turn back up after an average bear-market loss of about 31%.
But there has been nothing average about this bear market. At its worst, so far, the market has plummeted 52%. The last bear market that bad was in 1937-38, and the only one appreciably worse than the current one was-you guessed it-1929-1932, when stocks plunged 89%.
Why is this market so much worse than the previous ones? Here, the answer is simple: The financial crisis and the recession, which is still deepening, turned out to be far worse than most experts anticipated. Almost all mainstream economists still think it's extremely unlikely that the U.S. economy will experience anything like the Great Depression this time around, but the current recession looks worse than any since World War II.
What should investors do now? I say, you have to keep investing. Stocks are cheap, the mood among investors could hardly be blacker, and the Federal Reserve states it's willing to do anything it can to fix the financial system.
We're now most of the way through the worst decade for stocks in the past 100 years -- including the Great Depression. On March 24, 2000, the S&P 500 stood at 1,527. The S&P closed December 23 at 872. That's a loss of 43%.
The darkest hour in stocks usually is just before the dawn. Bear markets typically end in gloom -- and high volatility. I'd rather be a buyer of the S&P at 872 than at 1,527 -- when investors were wildly exuberant. When the next bull market arrives, it will do so without anyone firing a starting gun -- and stocks will likely rise far and fast. That's what usually happens at the end of bear markets, especially severe ones. Not that I know when this most severe bear market will end.
Steven T. Goldberg (bio) is an investment adviser and freelance writer.
Reader Comments (11)
Posted by: Kuebler at 12/24/2008 09:30:00 AM
You're counting on the Federal Reserve to get us out of this mess? It was the reckless credit expansion under the Greenspan Fed that caused this emergency...and the current "cure" under Bernanke is to force more credit into the system to re-inflate the bubble. This can't end well.
Posted by: rw at 12/24/2008 10:26:40 AM
What has happened here is this country now rewards thieves with rewards rather than jail. We allow people who break the law to escape with rewards. We promote social engineering instead of hard work. THAT IS WHY THIS DOWNTURN IS WHAT IT IS!
Posted by: Wayne at 12/24/2008 11:00:29 AM
This article said nothing about where to invest in 2009. The headline is misleading.
Posted by: Steve smith at 12/24/2008 06:35:40 PM
Peter Schiff of Euro Pacific should be at the top of this list
Posted by: F. Crockett at 12/26/2008 08:10:53 AM
Not worth posting this column - no real information. Not as the tickler seems to promise.
Posted by: divad41 at 12/26/2008 12:16:44 PM
One significant reason for this 'bear' market is that we can no longer put off paying our debts... we may shift them of to Uncle Sam, but he is us, and we'll carry the cost of our high living for decades to come (as will our kids, grandkids etc). I suggest in your 're-buy in' program to look at funds / stocks that have 'intrinsic' value that are industries people actually need, rather than 'want' related' industries. What's killing our economy (or more acurately returning it to reality) is the weeding out of 'want' based economic activity. In this grand era of sustainability, here is one of life's great lessons.
Posted by: Alex at 12/26/2008 04:31:30 PM
What's the point of this article? "Why is this market so much worse than the previous ones? Here, the answer is simple: The financial crisis and the recession, which is still deepening, turned out to be far worse than most experts anticipated" - great explanation...
Posted by: al best at 12/27/2008 09:39:12 AM
As children we were all taught to compete against each other…win or lose. Monopoly, sorry, dodge ball ,card games, musical chairs and even marbles. We all played Old Maid during the 1990’s and 2000’s When this game ended, the folks with the old maid (burden of debt, and inability out last your competition) lose, and the winners divide the remaining business. Currently , the US government doesn’t have any money. It takes in less than it spends and is now mortgaging its assets at a time when the assets are falling in value, just like the homeowners that took out equity loans to buy SUV’s and other toys on presumption that equity appreciation would offset the debt. One doesn’t get out of a hole buy digging deeper.
Posted by: D Emanuel at 12/27/2008 10:41:47 AM
At 62 years old, and "losing" $500/month by taking my Social Security check this year insetad of waiting for age 66, I am "in awe." Not that "anything is new", but that Mom and Dad's advice from years ago, was propehtic. "Don't invest in the market what you cannot afford to lose." Fortuantely, my wife and I anticipated (correctly) the coming "bubble burst" and still retain what we have invested, even though the "profits" are disappearing. Happy New Year!
Posted by: FG at 01/01/2009 03:11:53 PM
My comment as well. Seems this article has told me nothing more about investing in 2009 than my own financial planner who sat at lunch and said you were one of the lucky ones getting out of equities in Sept. when the Dow was still over 11,000 and saved myself from loosing at lot more than I did. No one seems to know where, when and what to put your cash into. Seems even the best balanced portfolios didn't make it this time!
Posted by: Janet at 01/23/2009 01:22:47 PM
For me, real estate investing is much more simple than the "numbers game". I don't need a middle man in real estate and whatever property I buy is my responsibility. Although the markets in either investing opportunities still dictates my return, in real estate I believe I have more control. Besides, I believe you should always diversify. A property or two would surely give you more stability. I encourage anyone vaguely interested to read "The Pizza Delivery Millionaire" by Rick Vazquez. He has great points and suggestions to not only get started but be successful. Thanks for the article Steven!