Mark Gregory Turansky

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What does that error mean?  The site below defines the error eloquently:

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What can you learn from the consumer confidence index?  Plenty, if you’re a fan of Warren Buffet!

Let’s look at this graph for a moment and focus solely on the points where consumer confidence slipped below 70: 1974, 1980, 1982, 1990/1, 2008.

1974

The first big dip on the consumer confidence graph above is October 1974 when the stock market tanked 40% in a single year (why does that sound familiar?).  How did Uncle Warren feel at that time?  “Like an oversexed guy in a harem.” The quote is from a Fortune article from 1974.

Note that consumer confidence cratered in 1974, touching below 60.  Buffet’s feeling was “Now is the time to invest and get rich.”

And what happened after the crash? Up 30% in one year.  Up 60% in two years.

1980

Another big dip in consumer confidence in 1980.  Lower than 1974.  If you were waiting for clear bargains in the stock market, how would you have faired?  Had you bought in the panic, you’d have gained nearly 30% in a couple of months.

1982

Consumer confidence gained after the 1980 dip, only to retreat again in the recession of 1982.  From nearly any point in 1982 (DOW around 850) to nearly any point in 1983 (DOW around 1250), you’d have gained 47%.

1990

Another hit to consumer confidence in 1990-1991.  Bill Clinton campaigned with the theme “It’s the economy, stupid!”   From the panic to the recovery by Clinton’s inauguration day (a little over a year), you’d have gained33%.

NOTABLE CRASH - 1987

Black Monday (again in October!) saw a 22% decline in prices.  Your shares would have recovered in two years, but buying in the panic yielded 16% in one year and 50% in two years.

 RECESSION 2002

We all know the market hit record highs in recent years, but simply focusing on the panic (again, October!) yielded 25% in a year and lots more if you held for another 5.

TODAY!

It’s October again and the market is down 40% year over year.  The world is ending!  Panic ensues!  Everyone get out of the market before all the banks melt!

Consumer confidence is as bad as it was in 1974, when that decade saw oil shocks and a renewed focus on ending dependence on foreign oil.  Sounds familiar.  History repeats itself.

But “it’s different this time!”  Maybe.  Yes, we’ve lived beyond our means as a nation for twenty years.  Yes, the housing bubble is causing a global financial mess that requires us to recapitalize our banks, but the Asian Tigers did it in the late 90s and Sweden did it in the early 1990s.  It costs money and it’s painful, but we’ll recover.  The dollar, incidentally, has surged during this global crisis.  Traders are moving towards a currency and economy they are confident will recover.

We might be good and truly screwed or this might be another deep panic by the masses.  It might be a good time to be an oversexed man in a whorehouse.

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It’s funny how math works.  The Dow Jones Industrial Average has declined 40% from its high last year of 14,000.  Sure, that’s bad if you’re near retirement and had all your money wrapped up in stocks.  It’s a fantastic buying opportunity if you’re young.

40% down means a 70% increase when it returns to the same level.  8300 is 60% 14,000, but 14,000 is 168% of 8300!

The Dow closed Friday 8/10/2008 at around 8300 points.  It’s a five year low.  When it hits 14,000 again, that represents a 69% increase from Friday’s closing price.  If it takes five years to return to the 14k level, that’s a very respectable 14% increase per year, not including reinvested dividends.  The dividend yield on a Dow ETF (I like DIA) is 4%, but even at 2% your five year return is increased another 8% for a total of 77% gain. A 4% yield would increase your five year return to 86%.

Consider the following table showing a 2% yield reinvested year over year:

1	$10,000.00  	0.00%
2	$10,200.00  	2.00%
3	$10,404.00  	4.04%
4	$10,612.08  	6.12%
5	$10,824.32  	8.24%
6	$11,040.81  	10.41%
7	$11,261.62  	12.62%
8	$11,486.86  	14.87%
9	$11,716.59  	17.17%
10	$11,950.93  	19.51%

Let’s not forget that the yield is a stock’s current dividend compared to price.  Your yield might be a lot higher.  How so?

If you buy stock in, say, Verizon at yesterday’s closing price (around $29), your dividend yield would be 6%.  Not too shabby.  $0.46 per share per quarter is $1.84 annually.  $1.84 / $29 = 6%.

But what happens if VZ increases their dividend two years from now?  Instead of paying .46 they start paying .52 per share.  Yield on your investment at $29 grows to over 7%!  The price of the stock may rise and new investors might still get a 6% yield, but your money is now earning 7%.  If they increase the dividend again two years later to .57, your yield relative to the price you paid will increase again to nearly 8%.

This blog post cannot be considered investment advice for anyone.  Consult your own financial adviser and be sure to diligently research any investment you’re thinking about making.  Just know that math is on your side should you invest wisely.

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