Investing has never been easy, but the last 15 years have been some of the toughest investors have ever faced, largely due to the fact that the US stock market has either been in a bubble or post-bubble Crash for most of that time.
Indeed, we officially entered a bear market in 1999 (or 2007 depending on how you look at it) but because so much of the US's collective wealth and economic activity relies on financial speculation, the Federal Reserve has essentially blown serial bubbles to combat the collapse ever since.
Because of this, many investors today view the stock market with suspicion. After all, if the only investing environments that occur are speculative bubbles or gut-wrenching collapses, it's hard to find any fundamentally sensible reason to invest in stocks.
Thus, in order to get a sense of why anyone would want to buy stocks now, we need to consider how the markets operated before the doctrine of serial bubbles took over.
For starters, the first thing you need to know is that historically dividends have accounted for 70% of all stock market gains.
According to a study performed by the London Business School, when you remove dividends, stocks have returned a mere 1.7% in average annual gains over the last 109 years. To put this into perspective, this is less than you'd make from owning long-term US Treasury bonds (2.1%) over the same time period.
Indeed, if you'd invested $1 in stocks in 1900 and reinvested your dividends, by 2009, you'd have made $582 (adjusted for inflation). Take out dividends and you'd have only seen $6 from price appreciation. Yes, $6 from 109 years' worth of capital gains.
Put another way, by focusing solely on capital gains when it comes to stock investing you're only doubling your money about every 18 years (remember, this analysis simply focuses on the returns generated by the market… which outperforms most professional and individual investors).
So… if you want to remain invested in stocks to the long-side right now, make darn sure you own a company that pays a dividend. The benefits of this are multiple: aside from providing most of stocks' historical returns, dividends also provide you with a cushion against market drops (if a company pays 3%, then stocks need to fall more than 3% for you to actually record a loss for the year).
Almost as important as the dividend itself, you want to make sure you own companies that will be able to maintain and hopefully grow their dividends. This means companies that have plenty of cash, little debt, and a history of raising dividends.
These criteria alone mean you're likely to be investing predominantly in large caps (these are the companies that have the cash and the history of paying dividends). Here are a few that have increased their dividends recently.
If you need to stay long the stock market, companies like the ones above are a good place to start looking. But whatever you do, be sure to find companies that DO pay out a good dividend and that WILL likely raise it in the future.
I'd also be sure to avoid small-caps and more risky plays.
Indeed, on April 27, 2010, I published an article titled, The Small Cap Bubble Is About to Burst. As the below chart attests, I was only off by a few days in nailing the top with that piece. In terms of calling a top while maintaining a publishing schedule, this is about as close to perfection as you can get.
In the six weeks after that piece went out, the Russell 2000 collapsed 14%. It was the worst collapse seen in well over a year with numerous 90% down days and some of the sharpest selling seen since February 2009. Depending on how you look at it, we wiped between four and six months' worth of gains in less than six weeks.
This is the reason that a serial bubble-blowing policy like the one the Federal Reserve is currently maintaining is a disastrous economic policy to maintain: when a bubble bursts (as all bubbles do) it takes a lot less time to wipe out the gains than it took to make them.
Granted, I'm very proud of my call, but something about it worries me. Ben Bernanke, our current Fed Chairman and a man hailed by most in the economist community as a "genius" (heck Time Magazine named him MAN OF THE YEAR) routinely states that he CANNOT identify a bubble.
Think about that. I'm just a lone analyst doing my own research and telling it like I see it. Ben Bernanke is IN CHARGE OF MONETARY POLICY FOR THE ENTIRE FINANCIAL SYSTEM. He has dozens of research assistants and colleagues to help him interpret the economic data that comes out. And he regularly confers with the most powerful financial figures in the world.
And yet, somehow I CAN see a bubble and he CANNOT.
Something about this whole arrangement is very, VERY wrong. Either Bernanke is not nearly as smart as people claim he is… or he is flat out lying about failing to see bubbles. Neither of those options is very appealing… or conducive to having much confidence in the Fed's policies.
Which might also explain why investors are pouring into Gold. When the guy in charge of determining the policy of a currency (the world's reserve currency no less) cannot see a bubble (even when stocks rally 100% in 12 months' time, something that only occurred twice in the US in the last 100 years) then it's probably not a good idea to trust him or the currency (or even the stock market he keeps inflating) for too long.
Which might explain this chart:
They say a picture is worth a thousand words. Well, the above picture is really just investors' way of saying four to Ben Bernanke and his ilk:
WE DON'T TRUST YOU.
Graham Summers
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