From The New York Times:

EVERYBODY'S BUSINESS

When Wall Street Frets, It's a Good Time to Buy
By BEN STEIN

THE NEW YORK TIMES April 24, 2005

TOPIC A in the world of investors is the health of the major market averages. Worried about oil prices, supposedly soft employment numbers, a tiny miss in earnings by Big Blue and God knows what else, speculators on Wednesday sent the major indexes to lows for the year and far below the happy numbers of just a few weeks ago. There was a major bounce back on Thursday and then a loss again on Friday.

I have a few humble thoughts about the recent mini-micro-crash:

First, it's called a stock market because it is a place where the investor can go to buy future flows of earnings and dividends. That is what is for sale on the stock exchanges - all of them. When you buy a stock or an index of stocks, you are buying the future earnings of those stocks. If the market falls, this is exactly the same as the stock market putting those earnings on bargain clearance sale. In other words, it's time to buy.

Yes, I know there are a lot of worries. There are always a lot of worries if you know where to look for them. But, guess what? Those worried times are the times when it is good to buy. When everyone is in a blissed-out mood, the way they were in 1929 or 1999, it is not necessarily the best time to buy. But when worriers and short-sellers and hedge funds have sold and driven down the price of earnings, you are getting a bargain on them.

This is today's story. Last year at this time, the Dow was selling for about 20 times earnings. As of Friday, the multiple was very roughly 17 - despite astonishing prosperity and a roughly 17 percent gain in Dow earnings since this time last year. Essentially, the clearance sale has taken very roughly 15 percent off the price of the exact same items, compared with a year ago.

Last year at this time, the Standard & Poor's 500-stock index was selling for 23 times earnings. Now, it is selling for roughly 20 times earnings, despite that same amazing prosperity and a gain of just under 20 percent in earnings for the S.& P. 500 over last year. Again, that means the S.& P. is offering you a future flow of earnings for a discount, in this case about 13 percent, off of last year's number.

In other words, Mr. Market, as the legendary investor Benjamin Graham called it, is cutting prices and giving you a chance to get in on the bargain.

Again, I know there are worries. Higher interest rates - when they happen, as opposed to just being threatened - will reduce the net present value of earnings. That is not a trivial matter. Federal and foreign trade deficits are immense. The overhang of deficits from Social Security and Medicare is stunning. But I urge you to go back to any era you choose and you'll find plenty to fear - nuclear war, inflation, energy prices, political uncertainty, stock market bubbles. Fears and worries are constants of the investment world.

And for all I know, the fears and worries will drive down share prices for another month or another six months or another year. If you are a speculator and a day trader, maybe you should sell.
But if you are an ordinary investor saving for your retirement with a 10- or 20-year horizon, our beloved stock markets are just begging you to buy.

I can put it another way. Thanks to the research skills of my writing partner and pal, Phil DeMuth of Conservative Wealth Management in Los Angeles, I have some truly amazing data about long-term investing. Consider this: The last time an investor in the S.& P 500, reinvesting dividends, would have lost money over a 10-year period would have been if he or she had bought on March 31, 1931. That was some 74 years ago.

From 1871 to 2002, the average gain of an investor who held his position and reinvested dividends for 10 years was a whopping 170 percent. For the investor who held for 15 years, the average gain was 342 percent; for 20 years, it was 600 percent.

The data from 1929 to 2004 are far more encouraging. The gains for 10, 15 and 20 years were roughly one-third better or more than those from 1871 to 2002. Gains for 20-year investors were roughly 900 percent.

Now, it may be that there will be nuclear war. In that case, no investment option except prayer looks good. It may be that there will be a new lethal and universal plague; again, prayer is the best option. But if the past is any guide, it tells us that there are plenty of times when the market is down for a month: almost 38 percent of rolling 12-month periods from 1871 to 2002 showed losses, averaging 3.4 percent. And there are many times when the market is down for a year - in fact, about 30 percent of the time during that period, for an average loss of 11.5 percent.

BUT when investors bought as serious long-term investors instead of speculators, the results were much different: The market was down during only 2.5 percent of rolling 10-year periods since 1871 - and, again, none since the one beginning in March 1931.

In research that Phil and I did for our book, "Yes, You Can Time the Market," we found that returns were even better for those who bought when the indexes were below their 15-year moving average of price to earnings than if they just bought randomly. This is such a time. (See for yourself at our Web site, which Phil lovingly maintains: www.stein-demuth.com).

In other words, when the going gets tough, the tough (and the smart) go shopping for stock - nice, juicy, broad indexes of stock. And now you know.

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