Grin and Bear It

This may be the most important investment column I have ever written. Because we are at a crossroads. And the decisions you make now have to be, in my opinion, grounded in some understanding of history.

It has been the “perfect storm” of bad news and the worst stock market I have seen since the 1970s. For those of you who were too young or who have forgotten (Americans forget pain very quickly), the 1970s was the last time there has been such a perfect storm. It was the tail end of Vietnam, a period more divisive to this country than any since the Civil War. President Richard Nixon had resigned in disgrace. There were hostages in Iran, gas lines, 20 percent interest rates, and commodity prices through the roof. It became a national obsession that the Japanese were going to take over the world. Thousands left Wall Street because they couldn't make a living. Volume on the New York Stock Exchange in the early seventies averaged 8 million (as opposed to today's several billion) shares per day. The Dow flat-lined between 1972 and 1982 at around 1,000, with major dips along the way. “What's the best way to call a stockbroker?” went the running joke. “Taxi!”

Sound familiar? Yet those times set the stage for one of the biggest growth periods in our history and a boom in stock prices, building to the Internet/tech bubble and ending in the gut-wrenching process you are feeling today. In the current climate, which is more symptomatic of market bottoms than of more horrible things to come, every news item tends to be interpreted negatively.

What never changes is human nature, and that includes fear and greed. When you feel in your gut that you can't stand it anymore, it is, in my opinion, too late to be negative and time to focus on what you want to own when markets improve. Because even though the popular averages went sideways during the 1970s, individual companies delivered well.

Which brings me to the theme of “the Cry.” The Cry is a motto that becomes a popular idea. The Cry is symptomatic of the times we live in and the (usually wrong) perception of those times. The Cry two and a half years ago was: “My neighbor's getting rich.” You don't hear that anymore. Before that, the Cry was, “How'm I doin' in relation to the S&P 500?” You don't hear that anymore, either. The new Cry is, “When is the stock market ever going to turn for the better?”

This is where knowledge of history comes in. When the news is negative, and the daily pressures are relentless, there are bargains in the market. It may take time for them to become apparent. But fear breeds mispriced stocks, the same way greed overinflates assets. I wrote months ago that whatever you were buying, you should take a two-year time frame. This is still true. But remember the early 1990s: real estate was in a virtual depression and every bank stock (in the wake of the S&L crisis) seemed to sell in single digits. In retrospect, bank stocks probably were the bargains of a lifetime.

What I'm saying is you will look back at this period and say, “Why didn't I buy American blue chips with strong financial conditions at discount prices?” If you didn't, and you're being honest, you will say you were afraid because all the news was bad. That's the best time to be putting your money to work.