Sunday, August 3, 2008

Investors shying from stocks right now rely on fairly simple reasoning: The market is haunted by recession, prices are weak; it's best to wait for better times, then invest.

If you're among this wary horde, Bill Bergman, a senior stock analyst with Morningstar, encourages you to step back and consider the long view of history. "OK," he wrote in a brief analysis last week, "if we are in a recession today, what does history tell us about the wisdom of buying stocks during a recession? History says it's time to load up."

Bergman fed the question through his number cruncher and discovered that investors who brave recessions are rewarded for their courage.

Here's how he came to his conclusion: First, he calculated how much an investor would have made by investing $1 in the Standard & Poor's 500-stock index every month since 1950. That investment -- $1 a month for 703 months, or $703 -- would be worth $9,300 today. Next, Bergman calculated how much that $703 would have returned if it had been broken into nine equal amounts -- $78.11 -- and invested in the first month of the nine U.S. recessions since 1950. To identify those nine months, Bergman relied on the official recession designations from the National Bureau of Economic Research. The return for those first-month recession investors would be $11,600 today, or 24 percent more than the gain for the steady, every-month buyer of the S&P over the period.

Investors get the better performance long term from buying in the first month of a recession because stock prices typically decline for a period before a recession is declared. But, of course, knowing which month is precisely the first in a recession is nearly impossible -- that's something usually only known in hindsight. But the lesson is still viable, Bergman contends. Markets come bounding back. Investors with the money and stomach to buy during the gloom are those who profit. "Ring the bell!" he chimes. "The time is ripe to seek out great companies at good prices -- and wade into them."

-- Steven E. Levingston