How Low Can Stocks Go?

Between Oct. 6 and Oct. 10, the Dow Jones Industrial Average dropped nearly 2,000 points. If it kept falling at that rate, the index would hit zero in less than a month.

Of course, we won't see zero. No matter how ugly markets get, the pain we saw these past few weeks can't continue for long.

But here's the bad news: Zero may be out of the question, but that doesn't mean stocks won't plummet from here. In fact, they could fall much, much further.

And history agrees.                                                                                                    

What goes up ...
The history of long-term market downturns is pretty abysmal. When times are bad, markets don't just get drunk with fear -- they start downing vodka shots of fear.

At times like this, nobody wants to own stocks. Their palms begin to sweat every time they watch CNBC. They bury their heads in the hope that the pain will go away. They throw in the towel and sell stocks indiscriminately. In short, it gets ugly.

Just how ugly? Have a look at the average P/E ratio of the entire S&P 500 index over these three periods of market mayhem:

Period

Average S&P 500 P/E Ratio

1977-1982

8.27 times

1947-1951

7.78 times

1940-1942

9.01 times

Compare that to the average P/E ratio today of around 20 times and a seven-year average of more than 24 times, and it's pretty apparent that stocks could fall much, much further than they already have, just by returning to the lows they historically hover around during downturns.

Assuming earnings stay flat, revisiting those historically low levels could easily mean a nearly 50% decline from here. For the Dow Jones Industrial Average, that'd correlate to roughly Dow 5,000 -- give or take. Of course, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history.

But what if it did happen?
What would happen to individual stocks? Here's what a few popular names would look like trading at P/E ratios of 8:

Company

One-Year Decline

Further Decline From Current Levels With P/E of 8

Yahoo! (Nasdaq: YHOO  )

 

(51%)

(56%)

Apple (Nasdaq: AAPL  )

 

(40%)

(60%)

Bank of America (NYSE: BAC  )

 

(48%)

(62%)

Adobe (Nasdaq: ADBE  )

 

(39%)

(56%)

Starbucks (Nasdaq: SBUX  )

(60%)

(52%)

Pfizer (NYSE: PFE  )

 

(27%)

(37%)

Schlumberger (NYSE: SLB  )

 

(52%)

(33%)

Look scary? It is. And it could easily happen.

But here's the silver lining: Every one of those stocks -- heck, the overwhelming majority of stocks -- are worth much more than a measly 8 times earnings. The only thing that pushes the average stock to such embarrassing levels is an overdose of panic, rather than a good reading on what the company might actually be worth.

Be brave
As difficult as it is right now, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. Those brave enough to dive in when no one else dares to touch stocks are the ones who end up scoring the multibagger returns.

Need proof? Think about the best times you could have bought stocks in the past: after the economy recovered from oil shocks in the '70s, after the magnificent market crash of 1987, after global financial markets seized up in 1998, and after the 9/11 attacks that shook markets to the core. As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether.

And that's exactly where we are.

Pick what side you'd like to be on
The next few years are likely to be quite a ride. On the other hand, the history of the market shows that gloomy, volatile periods also provide once-in-a-lifetime opportunities that can earn ridiculous returns as rationality gets back on track.

If you need a few ideas, our team at Motley Fool Inside Value is sifting through the market rubble to find those opportunities. To see what they're recommending right now, click here to try the service free for 30 days. There's no obligation to subscribe.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Pfizer and Bank of America are Motley Fool Income Investor recommendations. Starbucks and Pfizer are Inside Value picks. Starbucks and Apple are Stock Advisor picks. The Fool owns shares of Starbucks and Pfizer. The Motley Fool is investor writing for investors.


Read/Post Comments (52) | Recommend This Article (91)

Comments from our Foolish Readers

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  • Report this Comment On October 19, 2008, at 6:51 AM, cmolinel wrote:

    You said:

    "Think about the best times you could have bought stocks in the past: after the economy recovered from oil shocks in the '70s, after the magnificent market crash of 1987, after global financial markets seized up in 1998, and after the 9/11 attacks that shook markets to the core. ..."

    You said AFTER, not at the beggining.

    "And that's exactly where we are."

    Who knows?

  • Report this Comment On October 24, 2008, at 11:50 AM, wagonboss wrote:

    Morgan, it would be helpful in your article if you'd add a chart showing the competitive cost of capital in each of the low PE periods. As I recall in the 77-82 period, one could buy bonds yielding up to 20%, so stocks weren't too compelling until those rates dropped. What were the extenuating factors in the other two periods? These things need to be considered before broad brush statements are made about P/E ratios.

    Dan

  • Report this Comment On October 24, 2008, at 12:46 PM, donmetheny wrote:

    I think P/E ratios have been too high for far too long. I don't think it is unreasonable to demand a 10% return on the price of a stock considering the risk you are taking. A P/E ratio of 10 is my target. You can match a P/E ratio of 20 (5% return) in safer investments. You can "earn" 8 to 20 % by not using credit card debt. You can "earn" at least 5% by paying off your mortgage. Do the math.

  • Report this Comment On October 24, 2008, at 1:59 PM, StocksBuyorSell wrote:

    I think the market could still go down 40% or so and P/E rations dropping by half more for tech stocks.

    http://stocksbuyorsell.com/investment-news/

  • Report this Comment On October 24, 2008, at 2:01 PM, OldtimeCPA wrote:

    Both Wagonboss and Donmmtheny are right on the mark. Going a bit further, considering the risk, why can't we expect yields of 10% or better and not just a PE of 10? I've seen many companies that are great earners but that never have enough cash left over for dividends.

  • Report this Comment On October 24, 2008, at 2:17 PM, Darwood11 wrote:

    I don't know how low stocks will go, but as many people believe they will go lower and are operating out of a doom scenario, they probably will go lower. Will it be rough? Yes it will; however, I experienced the Arab oil embargo and had the misfortune of having a home equity loan at the time interest rates had gone north of 20%.

    My spouse and I are not investing for a 5-10 year horizon; We are investing with a 30-40 year horizon. For that reason I have made a list of stocks that I am very interested in purchasing. This week I purchased some of one of those companies. In the weeks and months ahead, I will be reviewing that list and purchasing more of those companies.

    Should I wait for the market to go lower? Why should I. In the next 30 to 40 years, we’ll probably have 6 or 7 more bear markets, and possibly one “mega-bear”. I learned a lot from the 2000-2002 bear market and one of the stupid things I did then was to liquidate. I lost a lot of money because I discovered I wasn’t very good at “timing the bottom” and neither were many of the so called experts.

    I do agree with financial planners who promote living below one’s means, and that includes paying off all debt; the mortgage, credit card, automobile, etc. I have done that and I have an “emergency fund”. So what I am doing today is investing cash that I’m earning today. I can put the surplus in a 1% savings account or a CD or I can earmark it for the stock market. I choose the stock market. So does my spouse, who also continues to fund her 401K and IRA twice each month, to the max.

    How will it turn out? It should be interesting. Well, we wanted change and by golly it seems we are going to get it!

  • Report this Comment On October 24, 2008, at 2:27 PM, Jabertone wrote:

    What do those of us without additional disposable income who have lost 30% of our portfolios do? Borrow money?

  • Report this Comment On October 24, 2008, at 2:32 PM, SoundInvAdvisor wrote:

    What's this about? Please check your numbers dear author and don't write stuff to scare people.

    Stocks trade at just 10.5 times forward earnings for the companies in the S&P 500, roughly equal to the average price-to-earnings ratio (P/E) for the last five bear market bottoms.

    Of course, one argument against using this approach is, "What if your estimate for earnings over the next 12 months is too optimistic?"

    It might be. But even reducing this estimate to $75 from $87 suggests the price-to-earnings ratio is still quite low. Using the current level of 905 for the S&P 500, the P/E would still be just 12.1.

    So where's the 20 times earnings come from?

  • Report this Comment On October 24, 2008, at 2:41 PM, TMFHousel wrote:

    SoundInvAdvisor,

    The 20 P/E mentioned for he S&P was sourced for the Standard & Poors site, found at the bottom of this page:

    http://tinyurl.com/5zrsfl

    This data was used because, as you mentioned, calculations can vary depending on what assumptions you use, and I wanted to keep the data consistent with the historical numbers pulled from S&P.

  • Report this Comment On October 24, 2008, at 2:41 PM, FOOLBEFREE wrote:

    Only PEs are not enough to project where the Dow will be. I think the Dow around 7700, the low of Oct 02, for a while is a possibility, not 5,000.

    Mostly 3 rational things make stocks go up:

    Interest rates, inflation and earnings.

    Interest are low and will be lower in the next 6-12 months --> this makes stocks a lot more attractive than treasuries. Inflation will be lower due to commodities collapse, which should last another 12 months. Earnings will start looking better in 12 months.

    Historically, stocks enter a bull market when stock earnings yields are higher that treasury yields, which is true right now and it will be still true in the next 12 months. Right now there is a lot of panic.

    Time to buy gradually from now until Sep 09 as long as you do not need the $ in 5 years.

  • Report this Comment On October 24, 2008, at 3:29 PM, jnoneil wrote:

    I agree with SoundInvAdvisor. The S&P500 P/E value is poorly represented in this article. The value given by the S&P website is from September 30th. I don't think I need to cite values for the S&P for September 30th versus today to anyone who has a pulse, to see why the 20 P/E ratio given is a farce for a timely analysis.

    Too much is changing too fast to not be current on market fundamentals for a historical comparison.

  • Report this Comment On October 24, 2008, at 3:32 PM, piperwarrior wrote:

    What is more scary are the stocks that disappear completely and never return. Their values in the stock market sometimes goes to zero without much warning or time to get out. An example is WaMu which I am sure just over a quarter ago was in just about everyone's portfolio.

  • Report this Comment On October 24, 2008, at 3:34 PM, mert9 wrote:

    You mentioned watching CNBC and feeling badly.

    Has anyone else noticed CNBC flashing "Is Your Money Safe?"

    What does it mean to see this flashing message "Is Your Money Safe?" thousands of time a day on CNBC? It certainly doesn't help investor confidence around the globe. A friend in the Far East has wondered about it, too.

    It is probably irresponsible like yelling "FIRE!" in a crowded movie.

  • Report this Comment On October 24, 2008, at 3:37 PM, TopDup wrote:

    The S & P 500 was 1166.36 on Sept. 30th as referenced by TMFHousel above. Currently it is around 888, which would reduce the Price part of the P/E ratio by about 24 percent, for a P/E of 17.1 by today's stock prices.

  • Report this Comment On October 24, 2008, at 3:41 PM, TMFHousel wrote:

    TopDup,

    Thanks for your comments. I think that's a fair calculation. I also think it's important to note that this article was published Oct. 18, when the the S&P was considerably higher than it is today.

  • Report this Comment On October 24, 2008, at 3:45 PM, chemdude47 wrote:

    Earnings, earnings, earnings! What will become of them for so many companies? Cash flow, cash flow, cash flow! If you want a stock with a 10% yield, do they have the necessary cash flow.

    Case in point: Regions Financial (RF). They just recently cut their dividend by about 75%. They had the earnings, even now, to cover most of the old dividend-but their cash flow collapsed. Goodbye fat dividend, hello average dividend.

    Find a company paying that 8 to 10% yield. Hey, stocks may not give you any meaningful capital appreciation for a long time, so get paid while you wait. Make sure the company's cash flow covers the dividend by a margin so that if that cash flow is cut by a margin such as 50%, the reduced cash flow still covers the dividend. I think you will have found yourself a good stock to buy.

  • Report this Comment On October 24, 2008, at 3:48 PM, healeyingarage wrote:

    I find it interesting that the most common discussion is about how much lower things can get.... If people truly believe things are going to get worse, then the correct action is indeed to get out of stocks... even now, when the prices are low. The prices are heading lower, so it only makes sense to get out. OK.... prices are expected to get better later? Do you really believe that "later" is next week?. I'd be truly shocked if this market turned around before next February. Some people think things aren't getting better until 2010. Maybe the smart people don't try to "pick a bottom"... but they don't stay in the market while it is clearly in a slide. Get out now, and plan on getting back in (gradually) when things are starting to get better. Unless you are good at picking a bottom to a market (and I'm sure not), then perhaps it is wise to wait until after the bottom has happened, and at least enjoy the upside when the market is climbing. All this encouragement to "stay the course" when the course is clearly heading downward just doesn't make sense to me.....

    Comments?

  • Report this Comment On October 24, 2008, at 3:58 PM, andrewvitch wrote:

    I have done extremely well in the real estate rental market by buying properties for their rental income and not appreciation. They did, however, increase in value. It made me feel better but I'm not selling so it doesn't really matter now that they are worth much more than what I paid for them. I am very happy to just keep cashing rent checks. They are now declining in value but it really doesn't matter either. People still pay me rent. They still need to live somewhere.

    About 3 years ago, I finally started applying that strategy to buying stocks. I sold off most of my mutual funds and as GIC's came due I bought good quality dividend paying stocks in the same manner as I bought property.

    Unlike in the 2000 tech boom and crash where I got killed, my portfolio is down much less and my income (dividends) keep coming in. My yields were slowly increasing on my original purchases each time there was an increase in payments but now it is like buying apartment buildings at half price.

    Every additional amount of cash I get, I am buying as I can't imagine this opportunity to last forever. GE yielding 6.8% this morning!? Bring it on.

  • Report this Comment On October 24, 2008, at 4:44 PM, c0ffeen0te wrote:

    A lot of talk about PE ratio

    How does anybody know what 'E' is in this economic environment? Third quarter earnings now coming out but a lot of the bad news didn't even come out until early October. How to predict last quarter earnings?

    8x could be a screaming buy. Its a matter of 8 times what.

  • Report this Comment On October 24, 2008, at 4:50 PM, 31555 wrote:

    We constantly hear "stay the course" because things will recover, even if it takes a few years. That's workable for people with a 10 year plus investment time span, but what about retirees like me? I hear no advice for those of us no longer working. Paul Krugman's advice to retirees: hope for better people in Washington, and get some good advice.

    What do I do, wait until 50 percent of my retirement account is gone and then move it somewhere?

  • Report this Comment On October 24, 2008, at 4:57 PM, rodby wrote:

    While a P/E of 10 implies a 10% return, that is not the whole story.

    Even a small increase or decrease in expected earnings can have a big impact on the present value of the future earnings stream.

    And in the end, I believe that the future earnings stream is the key driver of the stock price, and the reason most stocks today are valued higher than 10 is the belief that the earnings stream will ultimately grow in the future.

    And, much depends on the cost of capital. If risk free interest rates are 10%, you would be a fool to own stock that did not have a very low P/E.

    On the other hand, if risk free rates are 3%, then a 10 P/E could be thought as a relative bargain, even with no earnings growth.

  • Report this Comment On October 24, 2008, at 5:02 PM, Off1Ramp wrote:

    Well I loved what all of you had to say but the dow really could drop to 3K. 5K is really rather modest. The s&p and the nasq would follow suit. Of course none of you can see this happening. I hope it doesn't but the real power of the stockmarkets worldwide is the worldwide consumer. When does he get fixed?

  • Report this Comment On October 24, 2008, at 5:37 PM, Rorfool wrote:

    The point that investment advisors keep skirting around but need to STRONGLY emphasize to investors is that: When you hold a stock that goes down, say 50%, you haven't LOST anything. You only lose when you sell a stock. When you sell, you lock in the loss and there is no chance of recovering. But, if you hold on, you still have a chance to recover your loss. This seems like a very simple point, but it one that most individual investors do not understand which is why we have panic selling.

  • Report this Comment On October 24, 2008, at 5:46 PM, OldtimeCPA wrote:

    I like chemdude47's advice. Do any of you know of any solid stocks yielding 10% or more with really strong cash flows? 31555 also has some good advice for us about "staying the course," which is sort of like riding a lead sled at this point.

  • Report this Comment On October 24, 2008, at 6:07 PM, equnt wrote:

    Morgan, two thoughts on your article:

    1. You assume earnings will remain constant. Looking around at the fundamentals of the economy, I think that is an overly optimistic assumption. There are massive layoffs across all industries. GDP will be falling sharply for a few quarters- at best- and with corporate leverage profits will nosedive. If you don't believe that will occur, consider that about 70% of US GDP is consumer spending and the effect of the vast majority of people cutting back on their consumption. A P/E of 8 on much lower profit expectations is an even lower stock price.

    2. You cite as examples the buying opportunities of the 1970s, 1987, 2001. There are huge differences.

    During those prior periods a) the economy was fundamentally sound (other than very early 1970s, when if you bought you would have been a loser for quite a while before recovering). b) demographics- you had an expanding population pushing into peak earning and investing years...today the boomers have either bought all the "stuff" they need or are retiring and looking to downsize and start living on that nest egg c) Investment participation into "easy equity plans" like mutual funds, etc was increasing from very low levels. People began to think of these funds as savings banks. That plateau has been reached - it cannot rise much more but it can fall.

    And most importantly d) In those prior scares, investors were scared, but they did not give up on the market. They stayed in. The market sags were mostly driven by the large speculators, the "smart money", hedge funds et. al. The average investor with his 401k and his $50,000 even up to $1,000,000 portfolio did not move. That allowed the market to pop back. This time a lot of those average investors are getting along in age, see the financial and the basic economy crumbling, and probably will not stay put this time. This backbone of the market will take a large chunk of their money out taking away the last card out from under the house. That is why you have politicians, wall street types, and financial writers begging people go out and spend and to "ride it out".

  • Report this Comment On October 24, 2008, at 6:14 PM, NJSwampdragon wrote:

    P/E's are only a very small part of the equation. Who cares what a stock is trading for during trough earnings. In your Apple example, the stock would trade at like $38 with an 8 P/E, and $27.50 would be cash and it could generate $10 a share in cash in fiscal 2009, which is about what it generated last year. Apple now has like a cash flow yield off of EV of between 14-15%. That is the real return the company is creating for shareholders, not whatever its P/E ratio is.

  • Report this Comment On October 24, 2008, at 7:51 PM, RemingtonWagner wrote:

    You may try to use P/E's as well any

    type of metric, historical levels, ect.

    This market will obey the laws of

    physics, in that every action will have

    an equal and opposite reaction.

    That being said, this has been brewing

    for years and had to occur. After some more blood letting the earth will stop trembling. The traders and players will

    have invented a new game with all

    the accompanying loop holes. So it

    will be off to the races for another twenty years.

  • Report this Comment On October 24, 2008, at 8:40 PM, dfrndez wrote:

    Don't agree. The analysis is VERY oversimplified. You assume that Price depends the same on earnings today as it did 50 years or ago or more. Further you are assuming that any other factors are as little affecting (or as high affecting) to Price as they were 50 years ago as well.

    The landscape has changed significantly, there are more factors at play and to various degrees. For example, if the demand for stocks in general (not demand for a particular stock) is much higher than it was decades ago, prices will be higher and it wouldn't mean that they are inflated but rather that other factors that influence price (outside of earnings) are also rising in accordance. Perhaps people are investing more now because they understand that life expectancy now is much longer than 50 years ago and shrewd investment in stocks is almost necessary.

    If Benjamin Graham were to follow his NCAV rule today, he wouldn't be investing. There are no worthwhile companies now even in this economy that will satisfy his criteria.

    No way the DOW drops to 5,000. Just not happening.

  • Report this Comment On October 24, 2008, at 9:39 PM, JFrazer1 wrote:

    For all those asking 'what about us that need the money within the next 5 years (or other applicable close time frame)?'. Well, you shouldn't have had such a heavy position in stock to begin with. If you are within 5 years of needing money you should be heavily apportioned toward TIPS, Munis and Corporate bonds.

    I like Buffet's advice. If you aren't comfortable holding it for 10 years then don't hold it for 10 minutes.

  • Report this Comment On October 24, 2008, at 10:08 PM, jameslotp wrote:

    I still like stocks but what i would like even more is if TMF can provide the PER of the average 10 years earnings of the companies they recommend. That way, the exceptionally high earnings of the last 5 years can be even out and I get to see the long term average earnings of the companies.

    If the PE (current price and av. 10 years earnings) is still low, i will go for it. May be too conservative but I believe in this current environment, one can afford to be and still find lots of good investments.

  • Report this Comment On October 24, 2008, at 11:12 PM, etihwttam wrote:

    Very impressed with the quality and insight of the many comments here. The Fool at its best - a community of informed minds. In times like these, information is oh so important. Tough choices to make. All one can do is get the facts as best as possible and learn from mistakes. Historical perspectives are invaluable - thanks Morgan. Personally, I still think it's too early to add new money and just about too late to sell (if you were so inclined). Things are moving so fast and weird, let's just all meditate for a while (after voting for President).

  • Report this Comment On October 24, 2008, at 11:31 PM, newhouseri wrote:

    healeyingarage,

    It seems like a simple concept to get out because things may likely get worse. Its usually not that simple. If the market drops next week to 7500 on Monday. You throw your hands in the air and you sell everything trying to time the bottom, it may turn back on you faster than you thought. Maybe the market hits an intraday low of 6000, but violently moves back up quickly within a matter of hours.

    I personally believe there will be such a violent intraday 1,000 plus move down and back in the same day and then the market settles in the 7,000 range. If you decide to liquidate will you be sitting in front of your computer waiting for the down move happen just to be sure you don't miss it? Limit orders don't always get executed with big market moves. Will you have a watch list of every stock ready and the price to buy at? Will you have enough time to buy your stocks back at a lower price before the market moves back up. I believe what Buffet said is a good stradegy here. This is a good spot to begin adding oversold companies for long term holds not selling hoping for a better entry.

  • Report this Comment On October 25, 2008, at 12:40 AM, treeman102 wrote:

    31555 - you ask what is going to happen to your retirement fund? Let me answer your question with a question. Do you plan on using ALL of the money in your fund this year, or next year?

  • Report this Comment On October 25, 2008, at 12:49 AM, treeman102 wrote:

    newhouseri - i aggree with your responce to healyinthegarage but you left out one important thing-you can't buy back into a stock for 30 days if you sold at a lose. And most everybody right now is probably going to sell at a lose.

  • Report this Comment On October 25, 2008, at 8:15 AM, Beagle2Mars wrote:

    Jabertone - look up Sir John Templeton

    Darwood11 - that's great. Long may you prosper.

    The way I look at it when stocks are down there's no point selling at a loss. They'll come back up and as stockbrokers are forever pointing out there is no advance warning of an upturn. It's usually a spike that continues? The media is doom and gloom. It's up to everyone else to talk the markets up. Job losses? In certain industries. Take a job in another one. The UK's just been told it's in a recession. Plenty of job adverts in the newspapers so maybe whoever said it is wrong!

  • Report this Comment On October 25, 2008, at 11:25 AM, christopher52 wrote:

    treeman102 - There is no rule that says you can't buy back a stock for 30 days if you sell it at a loss. The 30 day wash sale rule prohibits you from claiming a capital loss for tax purposes if you repurchase the stock within 30 days, but it's entirely up to you if you want to forfeit the tax write off and repurchase the stock before 30 days. You can make losing trades in the same stock all day long if you want to.

  • Report this Comment On October 25, 2008, at 1:01 PM, TXJeff wrote:

    I've been involved with IRAs and 401ks for 30 years and now I'm age 53. Most of my coworkers in the past years spend less than 1% of their time working with their investments. Instead, they put their trust into "financial advisers" at places like Merrill Lynch or Wachovia. These "advisers" all seem to be doing an adequate (but not good) job when times are good, since they really couldn't guess wrong during these times. But when times get tough is when they are put to the test.

    The conversation I had with my "adviser", who said, "Historically during wartime a recession goes along with it."

    So my question was, "Wouldn't it be smart, if you predict a recession is coming, like now, that you get out before it hits?" In other words, if you foresee a truck coming your way, step out of the way, let it pass, and then get back on the road again.

    Both in 2001 and now (shame on you and shame on me) I predicted far in advance the truck coming and these bozo "adviser's" sold me on the idea to stay in front of the truck. Doh! My money would have been in safe harbor investments during these times and not down 25% after getting slammed. And when it hit a low level I could be buying back in again. Sell high, buy low. Not only must I recoup from the drop, but to be truly in a positive position, I would have to go beyond the break even point, plus beyond inflation. An ugly prospect, as it was in the 2001 era, IMO.

    Now, I've moved all my money into Fidelity where I have 100% control over it and don't have to depend on these "advisers". Wake up time!

    On top of that, the best profits I've ever made was not in the stock market and IRAs. It was in "company matching" 401ks - 25% to 100% profit! No big named investment companies could even come close to this profit in my portfolio.

    I think the focus on good dividend producing companies and real estate rental income sounds like some fine advice. Glad I have GE for part of that.

  • Report this Comment On October 25, 2008, at 1:05 PM, StocksYouth123 wrote:

    I don't know what will happen to the market, but I sympathize with those in their retirement years, wondering what will happen to them with their decreased income from stocks which were counted on to live from. I invest small amounts because it's all I can afford, sometimes buying 1 or 2 shares of stocks at a time--part of the reason I do it myself instead of paying out a fortune to a broker. Where will my $25 per month take me? Who knows, but now I 'own' my own house (unless I miss payments), work for myself from home at a job I love--and a job that people will always need (childcare), and have a husband nearing retirement and already semi retired---with little to no retirement fund to rely on (we used it to buy the house and lower credit card dept). So far dividend paying stocks have done well for me--even in small amounts. Am I investing money that I will need for the next few years? Most likely. But in the mean time I get dividends and have hope that the market will get better, even if just a little. As to retired folks...

    Unfortunatly, those who relied on their investments for income may have to go out and get a part time job- there are many out there for those willing to take min wage (fast food or retail type) and don't forget talking with people you know in your community--do you breakfast at McD's every day? They know you, talk to them!! What about church, etc? And, as much as you may not want to--go to welfare! You put into it for years, now it's time to get some of your money back. I was on it for a few years and was very greatful it was there!!!

    Has anyone else noticed an increase in garage sales? People are selling their 'toys' as they are having a hard time affording them. Telling a retired person they shouldn't have been in this position when the market was looking good, or that you shouldn't have $ in if you can't afford it, is crazy. What was the advice just a year ago---put it in the market! Let's be pratical. Is there anyway you can lower your expences? What about sharing living quarters and expences? Many people are renting out rooms. Would you be willing and able (because I am aware that some can't) to offer services for yard or house work? Talk to your neighbors and others. What are other retired people doing to suppliment their income at this time?

    Sorry I can't help more, but each situation is different. My advice about stocks for people who are retired--keep going for dividend paying and pray for the market to stablize!

  • Report this Comment On October 25, 2008, at 2:23 PM, newhouseri wrote:

    stockyouth, You may want to note many of the stocks paying dividends may not be paying dividends moving forward due to cash flow and credit issues. Many may reduce the dividend dramitically.

    The point is you really need to dive into the company's financials and be sure they have a good cash flow and debt is not a big issue. Its quite easy to do and these records are all available through your online broker. A lot of companies are addressing the dividend in their quarterly conference calls.

    I do agree that dividend stocks, preferably blue chip variety such S&P or companies that have gone through difficult periods before.

    Good luck to all.

  • Report this Comment On October 25, 2008, at 5:50 PM, Otrader97008 wrote:

    In the past, we have managed to increase debt in order for the good times to continue. Now it appears that we will be doing the same? Pump dollars into the system so it can be loaned out, and then will we eventually hit another ceiling and on and on...

    It will be at least 2 years until there is any sign of a recovery. On the radio there was a professor of economics from NYU who said move your money to cash and made a very strong case to do so. He said that when DOW was at 13,000. Well, I took his advice. He came back on the radio when it was 10500 and said, he does not see any sign of improvement. With every bounce met with selling, I think we still have more downside to go. How much, no one knows. I just keep telling myself that only monkeys pick bottoms.

  • Report this Comment On October 25, 2008, at 7:24 PM, hydrojoe wrote:

    I started investing in 1993 and rode 2 bull markets to the top and right down to the bottom again. I've learned the following:

    1. Nobody cares more about your money than you so follow the market and sell your funds (stocks) when you recognize the markets are fully valued and you are satisfied with your returns, put your money in cash and wait for something like we have now to re-invest).

    2. Mutual fund managers are generally good at buying stocks but stink at selling. (Isn't that part of "managing" that you pay management expense fees for?) Use them for your stock buying and do the selling yourself.

    Fortunately I followed this path and went to cash in Jan. 06. The funds I owned at the time are down at least 40%-60%. So even if I bought Monday Ive got that in the bag. That said, the biggest challenge now is to discern when were in the bottom of this saucer (market) and re-invest. I believe there is more forced selling that needs to be done before that time arrives.

  • Report this Comment On October 25, 2008, at 9:07 PM, KarlaHomolka wrote:

    "Of course, we won't see zero."

    I respectfully disagree. I think the stock market can and will go to zero.

    The buyback of bad debt is being done in an attempt to prevent the derivatives market from collapsing. The derivatives market is $700 trillion, twice the value of the entire plant. The buyback is far from sufficient. The bubble is bigger than anyone imagines. The market will go to zero.

    Watch.

  • Report this Comment On October 25, 2008, at 10:02 PM, awallejr wrote:

    So let me see if I understand you Karla. You are saying that a company, say Microsoft will go to zero and continue to pay its dividend? You'd be a jackass not to buy up the whole company then for a penny.

  • Report this Comment On October 26, 2008, at 12:34 AM, bbrriilliiaanntt wrote:

    Yes, the DOW could go to < 3000, a < .0001% chance, that is clear, life is uncertain; and dangerous...

    Realistically, there has never been a drop in the S&P of over 48% in history, barring the GD, which is very unique.

    Could we be goin' into GD2, yes, possibly, very unlikely, very_very unlikely...things are quite different now for reasons every on this board should be aware of..

    We are 43.5% off the highs (to date!), and given that the worst 5 bear markets were between 43 and 48%, we should be very close to the bottom..

    Never say never, and beware of the higgs boson....but,

    Put as much as you possibly can into the market every month or 2 weeks from now until the S&P hits 1200...(most likely within 2 to 3 years), if you do this, statistical probability pretty much guarantees a massive return, based on the points of analysis to date...

    If we do enter GD2, unlikely, but possible...begin to enjoy every sunset as such...life is much more than greenery on a chart...

    Cheers...Craig...

    <;)

  • Report this Comment On October 26, 2008, at 12:55 PM, BobinHI wrote:

    An original focus of this article was P/E for S&P 500. For years, Carl Swenlin at Decision Point has discussed this. To quote: "The real P/E for the S&P 500 is based on "as reported" or GAAP earnings (calculated using Generally Accepted Accounting Principals), and it is the standard for historical earnings comparisons. The normal range for the GAAP P/E ratio is between 10 (undervalued) to 20 (overvalued)."

    Right now, the GAAP P/E is around 16 to 17. See a full discussion at:

    http://www.decisionpoint.com/TAC/SWENLIN.html

  • Report this Comment On October 27, 2008, at 4:28 PM, ellenlwb wrote:

    I agree with mert09 that the media coverage overall is very negative. We need positive input to create new ideas for new products and solutions. Personally I think we need a National Prayer Hotline for the Economy and pray for miracles to happen!

  • Report this Comment On October 27, 2008, at 4:53 PM, NoOracleHere wrote:

    The writer writes "Of course, we won't see zero." Readers must interpret however that while the market never goes to zero, individual stocks sometimes (often?) do go to zero. One reader commented, "You'd be a jackass not to buy up the whole company then for a penny." But this doesn't work. Because once the company goes to zero, it is either taken private, goes into bankruptcy, or worse. When a company goes to zero, it usually does not return. An investor must always keep in mind that zero is always possible, and that the probability for doing so is finite and not diminishingly small. Witness AHM. It is not zero yet, but 1 penny is not much different. Don't expect to profit, either, by buying those shares at a penny. What amazed me about AHM is that they never reported a negative quarter. They never got the chance.

  • Report this Comment On October 28, 2008, at 9:12 AM, docwife wrote:

    S&P companies that need to use credit to fund purchase of inventory or supplies will be in trouble until the banks start lending again. Seems like PE will be dependant on that, and on many other less tangible things as well. Such as: trust. People have been shaken to the core by the imprudence of Congress and financial institutions. The average guy feels overwhelmed by the bad decisions of others, who supposedly had the skills to know better. This will affect investment decisions. Another problem: two career couples. Books have been written on the need for mothers to work to maintain lifestyle and send kids to school. If one wager earner loses his or her job, spending will plummet. Families will be in severe trouble. Another is credit cards: how much of demand over the past 30 years has been driven by running up credit card debt? The last is politics: someone in Congress is actually scheduling hearings about the government confiscating 401-K's and depositing the money in (non-existant) Social Security accounts, paying the holders 3% interest, and eliminating the deduction for 401K's. Are these people crazy? That they would even discuss such a thing at a time like this suggests that some members of Congress are orbiting in outer space. Who would invest in stocks if the government can confiscate your assets?

  • Report this Comment On November 21, 2008, at 11:25 AM, vyinvestor701 wrote:

    In cleaning out old email box wondering how many really felt this could happen a month ago. Good article.

  • Report this Comment On December 09, 2008, at 4:41 PM, 101profit101 wrote:

    I really enjoy this forum, Thanks to all your comments some very intuitive and some far reaching into the (Gloom and Doom) Keep posting and heck I may even put in my two cents worth too! Stay cool, take a deep breath, then keep a watchful eye on the market, don't jump off the cliff with the rest of the Lemmings. Take care, it will eventually hit bottom and be ready for the great ride up.

  • Report this Comment On March 05, 2009, at 2:56 AM, BinaryChoice wrote:

    Oh yes. Dow 5000 looks more likely today than it did back then.

    This article is a sage bit of advise about historical lows.

    What if the current crisis is "GD2"? Will the S&P P/E go to 5? That's "Dow 2500".

    Yikes.

    It's at least worth thinking about. I sold out of the stock market in 2005 and only recently (last week) got back in. Unfortunately, my 2005 position was only a few thousand $$ which I put into my new house (which is currently at 150% LTV....)

    Anyway, It's always prudent to avoid underestimating the downside.

  • Report this Comment On December 07, 2009, at 3:34 AM, b3rkut wrote:

    what i find interesting is that at the end of the article, it states that BAC is a motley fool income investor recommendation...?

    since they have almost no dividend (0.04%), whats the reasoning for having it as a current dividend recommendation?

    obviously its great to buy on the cheap and wait a few years for the dividend to return, but still...

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