Don't Give In to This Fear

Here's a couple of predictions I recently came across:

  • "We are in the early stages of a long cycle of generally accelerating inflation."
  • "If we do not solve the energy crisis, the American Dream is over."

Where'd I find these bearish remarks? They weren't part of a Jim Cramer rant or a Barack Obama speech. In fact, they weren't made by anyone contemplating recent headlines.

Nope -- these are from the pages of Howard Ruff's 1981 book, Survive & Win in the Inflationary Eighties. These eerie predictions -- which sound like they were stripped from the front page of a recent Wall Street Journal -- are nearly 30 years old!

You'd think that after 30 years, we'd have moved on.

Unfortunately, we haven't
In times like this, many investors take as gospel that "The worst is yet to come."

Sometimes it's true -- but often it isn't. And then you end up like the tragic John Marcher in Henry James' The Beast in the Jungle, missing out on everything good that life has to offer simply because you were paralyzed by a fear of the unknown future. And that would be a shame.

As we (and, unfortunately, the adopters of Mr. Ruff's advice) now know, inflation didn't reach unimaginable heights. Rather, it peaked in 1980 at 13.6%, and then hovered around 4% for the rest of the 1980s. The "energy crisis" of the 1970s (which people argued was brought on by high domestic consumption and low domestic production -- sounds familiar, don't you think?) didn't end the American Dream -- nor did an economic bomb explode.

In fact, if you'd followed Mr. Ruff's doomsaying advice to load up on a precious metal like gold, your annualized returns on that investment from 1981 through today would have been a measly 1.2%, meaning your investment would have lost money due to the effects of inflation. 

However, if you instead ignored such bad advice, sat tight, and kept your money in stocks, you would have made much more. Over that same time period, which includes the recent market volatility, the S&P 500 has risen by an annualized 8.4%.

Beating the bear
Right now we're seeing parallels with the early 80s -- inflation is creeping up, the economy is stagnant, and gas prices are outrageous -- and investors are fleeing the market in droves.

Things always could get worse -- I don't want to downplay that. But it's not inevitable that things will worsen, which is where folks like Mr. Ruff and Mr. Marcher -- and those fleeing investors -- go wrong.

Just as it was when Mr. Ruff wrote his book, the best way to invest in a market like this is not to abandon stocks in favor of commodities, which are now trading at historic highs. Rather, it's to take advantage of rock-bottom pricing on the world's top companies -- companies with strong brands, wide moats, and attractive growth prospects.

Take a look at these high-growth companies trading at historically low multiples:


5-Year Per Annum Analyst Growth Estimates

Current Price-to-Earnings Ratio

5-Year Average Normalized Price-to-Earnings Ratio

Google (Nasdaq: GOOG  )




Yahoo! (Nasdaq: YHOO  )




Infosys Technologies (Nasdaq: INFY  )




Wipro (NYSE: WIT  )




Akamai Technologies (Nasdaq: AKAM  )




Hansen Natural (Nasdaq: HANS  )




Tessera Technologies (Nasdaq: TSRA  )




Data from Yahoo! Finance and Capital IQ, a division of Standard & Poor's.
*Four-year average.

While I can't predict the future any better than Mr. Ruff can, I'd argue that in another 27 years, betting on opportunities like these will have been the right choice.

Growing your wealth
Whatever else is happening, the current market environment has brought the world's best growth companies down to unbelievable price levels. So as you seek out top growth companies in this market, take a page from the playbook of our Motley Fool Rule Breakers team. Search for:

  • Top-dog and first-mover status in an important, emerging industry.
  • A sustainable competitive advantage gained through business momentum, patent protection, visionary leadership, or inept competitors.
  • Great management with financial backing from smart investors and corporations.

Need proof that those criteria lead to market-beating investments? The Rule Breakers service has outperformed the S&P 500 by more than 11 percentage points since inception in 2004. If you'd like to see what companies the team likes today, click here to try the service completely free for 30 days.

Adam J. Wiederman owns no shares of any company mentioned above. Google and Akamai Technologies are Motley Fool Rule Breakers recommendations. Tessera Technologies is a Motley Fool Hidden Gems Pay Dirt pick. The Fool's strict disclosure policy can be found here.

Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 22, 2008, at 11:18 AM, artisanp wrote:

    Howard Ruff was simply ahead of his time. He was right about the message, but not right about the timing. Today we have macro-economic factors which did not exist in Ruff's time, which all but guarantee Ruff's prophecies to come true in the 21st Century: An exploding economy in China, India, Brazil. Low cost energy and raw materials have provided the impetus for our affluent American lifestyle as long as these were cheap. With strong demand from these other exploding economies, all of which have cheaper labor costs than we do, we will no longer enjoy cheap raw materials and energy to fuel our lifestyle. The party's over, folks. The survivors will be those who recognize this early on and make appropriate adjustments financially. Those who are still living in the 80's and 90's are going to lose. It is true, if you repeat a prediction long enough, you are going to be right sooner or later. Now is Mr. Ruff's time to be right, and by the way, he was not the only person advocating gold and resource investing back then.

  • Report this Comment On August 22, 2008, at 1:49 PM, tumachar wrote:

    As I see it, the IT companies of India, and Manufacturing of China represent what was japan during 70's and 80s. The growth is exploding there.The time will come when this will saturate and slow. If and when that happens, they will take long time to recover unless they are able to avoid what Japan could not.

    India would still be IT outsourcing place, China will still be manufacturing poweress, however their internal economy which has depended on these to grow exponentially, placing big multiple on everything, will have to readjust the multiples resulting in falling prices etc.. (Their minsky moment)

    American will feel the pain from this readjustment...

    All this tells me that next 4-5 years are the years of "hard resources" like gold, till these exccesses in system are cleaned out.

  • Report this Comment On August 30, 2008, at 3:35 PM, curious2010 wrote:

    I enjoy reading these comments, but what most small, or begining investors haven't figured out is, every investor has the same tools as the best financial advisor out there thanks to the internet. Information is available to any one who wants to put forth the effort to look for it. You can search for little or no cost, or you can pay big bucks for some one to do it for you. As far as China and India are concerned as to the economy of the US, it is being determined by the speculators and the forecasters who have no more of an idea as to what is going to happen in the future as that home less person on the street corner.

    Its all a guessing game and some people (financial forecasters) as they are called get paid to tell investors what they want to hear. If your fortunate enough to gather the best information out there, and go the direction it tells you then you might make some money.

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