The Biggest Stock Market Investing That You Actually Believe
InvestorEducation / Learning to Invest Feb 25, 2013 - 06:35 PM GMTBy: DailyWealth
Steve Sjuggerud writes: You hear it all the time... but it's completely wrong.
I know, I know... It sounds so right and sensible, it must be true. But it's completely false.
It drives me nuts.
"Expert" after "expert" repeats this lie on the financial news... and the "experts" sitting across from them never correct the lie.
For me, it's an easy way to know if an "expert" is legitimate or not. If he spouts this lie, he doesn't know investing.
The simple, innocent lie goes something like this: "Well... the economy is doing better, so the stock market should do better, too."
Sounds believable. But it is simply not correct!
The truth is, to make the biggest gains going forward, you want to buy into a "bad" economy – one where economic growth is zero or lower. The lesson of history is clear:
• When the economy is doing great, chances are stocks will underperform over the next year.
• When the economy is doing badly, chances are you'll do very well in stocks over the next year.
This isn't just my opinion, this is a fact...
You see, with my True Wealth Systems service, I have access to the best financial databases in the world. So to answer this question as completely as possible, I looked at U.S. stock prices versus the U.S. economy going back to 1800.
Astoundingly, since 1800, when the economy has been doing really well (when "real GDP" has grown at 6% a year or more over the preceding 12 months), you would have lost money in stocks over the next 12 months.
On the flip side, when the economy was contracting (shrinking), you'd have made a lot of money in stocks. The compound annual gain in the S&P 500 Index a year later was 50% higher than the gain in the index with "buy and hold."
You might say, "Steve, what happened in the 1800s doesn't matter as much here in the 2000s."
OK. Well let's take a closer look... Quarterly data for U.S. economic growth starts in 1947. So let's start in 1947 instead of 1800. The results turn out the same.
Since 1947, simply buying and holding stocks would have earned you a 7.3% compound annual gain.
But when the economic times are great – when the economy has grown at 6% a year or faster over the preceding four quarters – stocks have delivered a compound annual gain of 4.2% over the next 12 months.
Meanwhile, when the economy has contracted over the preceding four quarters, stocks have delivered an astounding 18.5% compound annual gain over the next 12 months.
Look... You've even experienced this effect – recently!
The economy was shrinking for all of 2009... Stocks bottomed in early 2009 and then soared!
You know what I'm saying is true.
You see, great conditions get "priced in" to the stock market. By the time things are great, stocks are usually too expensive (and due for a big fall). When things are terrible, stocks become very cheap. You want to buy when things seem terrible.
You do make money in "normal" times, of course... But the biggest gains come after the economy has been shrinking. And stocks perform their worst after the economy has had a great run of growth.
Don't let the "experts" tell you any different!
Good investing,
Steve
P.S. We spent almost $1 million putting True Wealth Systems together. We've backtested it in 48 different sectors... including biotech, steel, gold, and emerging markets. The results are incredible: 249% gains in India... 331% gains in the tech sector... even 101% gains in safe "virtual banks." If you'd like to know more, I cover some of the details on how our systems work right here.
The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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