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Painful Times Call for Common Sense

Levelheaded Perspective on the Financial Crisis

 Kenneth S. Janke The third-quarter report from our friends at investment management firm David Wendell Associates in Portsmouth, N.H., provides a sensible look at the meltdown of financial stocks and what it means to world economies. The newsletter points out that we’ve survived similar periods and that long-term investors should continue seeking stocks of high-quality growth companies, many of which are trading at historically attractive valuations.

Titled “The Importance of Common Sense,” the report begins with a statement by Sir John Templeton, founder of Templeton Mutual Funds and an astute investor and portfolio manager who passed away this year: “Profitable investing is mainly common sense. Don’t get carried away by enthusiasm. Don’t get carried away by despondency. Don’t buy things you don’t understand. Always study what you buy in advance. Make long-range plans. Know in advance that you are going to have to live through bear markets. Just use plain common sense and the chances are that you’ll have superior long-term investment performance.”
What we’re going through is not unlike other periods of financial history. For example, when the market declined 45 percent in 1973-74, a nationwide Gallup Poll at the time found that one out of every two adult Americans believed that a 1930s-style depression was at hand. Instead of that occurring, the economy began a very strong recovery that lasted for nearly five years.
The same was true on Oct.19, 1987, when the market dropped more than 20 percent in one day. Yet the recovery was swift and the economic improvement lasted a long time with strong corporate growth. Of course, there are recent examples as well, such as the market decline just 10 years ago.
It should be mentioned that although we may be entering a recession, since World War II stock prices have gone up, on average, during periods when business activity went down. The past is never a guarantee of the future, but it’s nice to have history on your side.
Summarizing, David Wendell Associates wrote:
“During economic turmoil and major declines in the stock markets, many investors assume the damage is permanent. But the intrinsic worth of a portfolio does not change unless the fundamental characteristics of the investments have changed. As long as the companies owned continue their trend of growth in earnings and dividends, their publicly traded common shares will eventually reflect this progress.
“The credit crisis is likely to be long-remembered. Recent events will serve as a reminder — especially to today’s host of newly seasoned, crisis veterans — that there is no free lunch and, more importantly, that investment quality is ignored at great peril.
“Keeping an optimistic outlook can be difficult, especially when everyone ‘knows’ the outlook is dire. But experienced investors know that a levelheaded approach is the best way to attain investment success over the long term. After all, it’s just common sense.”

Kenneth S. Janke, Sr., was the long-time president of BetterInvesting and a member of the magazine’s Editorial Advisory and Securities Review Committee for many years.

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