It's So Much Better Than You Think

Gas is $4 a gallon! And home prices are down! And inflation is up, too!

In the words of Arnold in Kindergarten Cop -- stop whining!

You lack discipline
See, back in March, my esteemed colleague Richard Gibbons argued that "It's So Much Worse Than You Think," pointing to falling home equity, the credit crisis, and poor consumer-confidence figures as signs of economic trouble ahead. His advice was to refocus our investments on undervalued companies.

It's great advice, don't get me wrong. But the current economy might be better than we think.

Cranky consumers
What makes the current economic outlook so dreary is that it's mainly consumer-driven. Combine the fact that consumer confidence measures are near generational lows with the reality that two-thirds of our economy is based on consumer spending, and you have a recipe for a bad economy. Add embellished media coverage, and it only gets worse.

But is it reasonable? According to a recent article in The Washington Post, "The last time consumers were this miserable, in May 1980, the jobless rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent, respectively."

It's all relative, of course. We haven't seen 5% inflation since 1991, so it's understandable if that 4.2% figure freaks you out a bit.

And then there's gas, which is up nearly 200% in five years. What's worse, we're reminded of this each time we pull up to the pump. Hey, I don't like paying $4.23 for gas either, but consider that on an inflation-adjusted basis, gas cost $3.50 a gallon ... in 1918. That doesn't make it any less painful, but the historical perspective counters the claim that this jump is extraordinary.

The economic situation is undoubtedly not as rosy as it has been over the past five years or so -- but it's also not as bad as we might think it is.

The art of staying in a hot kitchen
So does this mean Gibbons' advice is bunk? Not so fast.

Whether the economy is horrible or only so-so, it's important to stay invested in stocks. A report from Tweedy Browne notes that "Empirical research has shown that 80%-90% of investment returns have occurred in spurts that amount to 2%-7% of the total length of time of the holding period. The rest of the time, stocks' returns have been small. With stocks, you have to be in to win."

In other words, if you miss out on those big market days (and they can happen any time), your returns will suffer. But that doesn't mean you should buy just anything. It's always important to have a portfolio of good companies purchased at a good price.

One way to find good companies trading at a discount is to follow a strategy used by Ron Muhlenkamp, which is to look for stocks that have a return on equity greater than the price-to-earnings ratio.

I ran a screen for those criteria, and more than 700 companies came up. Here are a few you could research further:

*Source: Capital IQ, a division of Standard & Poor's, as of June 20, 2008.

Put the babies to bed
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Todd Wenning was the Sausage King of Chicago before that Abe Froman character showed up on the scene. He does not own shares of any company mentioned. NVIDIA is a Motley Fool Stock Advisor recommendation. The Fool's disclosure policy is a righteous dude.