Mellody's Math: Investing with Courage

History proves bear markets are where investors make their money.

That's right — bear markets, which are when major stock indexes like the S&P 500 see a 20 percent drop.

Those investors who held onto their stocks through the bottoms of the 12 bear markets since World War II gained 32.5 percent on average in the first year of the market's recovery.

But by taking your money out and waiting just three months to reinvest, you'd typically gain only 14.8 percent.

The lesson: Buy low, sell high and buy with patience.

Silver Lining in a Dark Cloud

Immediately following the events of Sept. 11, 2001, pundits and analysts alike advised investors to be wary of certain segments of our economy.

For example, sectors such as travel and leisure were viewed as almost certain losers. Analysts assumed people would stop traveling and vacationing.

But the reverse has proven true. In fact, companies like casino giant Harrah's, slot machine manufacturer International Game Technology and worldwide hotel chain Hilton Hotels Corporation helped to propel the hotel, restaurant and leisure sector close to the top of all performing industries since last year's attacks.

Another company that had a dire label affixed to its financial prospectus was Carnival Corp.. Again, analysts were quick to assume people would be less likely to take cruises, and as a result the stock was hammered immediately after the markets reopened following the attacks.

But since then, the stock has gone up from $19.43 to $24.31 — a 25 percent gain!

Home Is Where the Money Is

Another example of a positive since the terror attacks is the housing market — the brightest spot in our nation's economy.

In fact, the housing market has performed exceptionally well during the post-attack recession. Sales of new homes in July climbed to a seasonally adjusted annual rate of 1.02 million, a record sales pace and a 6.7 percent increase from June's level.

The hot housing market did wonders for those companies whose businesses directly serve consumers interested in remolding their homes.

For example, Lowe's saw the value of its stock rise by 55 percent since the events of last September. Likewise, tool manufacturer Black & Decker witnessed a 33 percent increase in the value of its stock.

The same companies which benefit from an increase in new home sales also reap the benefits of refinancing and home equity loans, as homeowners frequently re-invest the saved capital directly back into their homes to make improvements.

A Lesson in Courage

One of the lasting lessons of the last year is the need for courage — a trait common in all successful investors.

After the tragic events of that day a year ago, as well as after the handful of debilitating corporate scandals to rock Wall Street, like Enron and WorldCom, it took great courage and discipline to remain invested in the market.

An investor who had the courage to drop their line to the bottom of the market would have found some wonderful brands and franchises trading at attractive post-Sept. 11, 2001 prices.

Where Should You Look Now

Bottom fishing is an excellent way to find the overlooked, often battered, yet hardy companies.

I am certainly not suggesting investors blindly purchase the market's worst performing industries without regard to specific company fundamentals. However, solid but slightly damaged companies often can be purchased at great bargains.

Page
  • 1
  • |
  • 2
null
Join the Discussion
You are using an outdated version of Internet Explorer. Please click here to upgrade your browser in order to comment.
blog comments powered by Disqus
 
You Might Also Like...