When Should Gay Men Invest?

Joshua Kennon, About.com Guide to Investing for Beginners, answers questions gay men have about investing and saving money.

I asked: Are bad economic times a good time to invest?

Joshua said: It is often during difficult financial times that fortunes are made. Those who have managed their affairs well, kept their debt low, and built up cash and earning power often find themselves in the enviable position to acquire assets at distressed prices. This includes everyone from the average worker that continues to invest regularly through his or her 401k or Roth IRA to the small business owner that uses a recession to negotiate more favorable lease terms on a new storefront or building. In my own case, my businesses and personal accounts are full of shares of companies that were selling for next to nothing during the last bear market in 2002-2003; many of these positions are now up 600%+ and they range in everything from an industrial gasket and lubricant company that was spun-off from an aerospace firm to shares of a well known teen retailer that experienced a rise of roughly 700%.

Warren Buffett has said that stocks are the only things people don’t want when they are cheaper. If cars, hamburgers, real estate, perfume, gourmet coffee, furniture, clothing, concert tickets, or televisions go on sale, you’ll see people lining up outside of the stores at 3 a.m. to be first in line to save money. But if the market goes south and shares of companies that serve as the backbone of America (think General Electric, Wal-Mart Stores, The Home Depot, McDonald’s, Starbucks, Johnson & Johnson, etc.) drop in price, they not only refuse to line up to buy more, they often bottleneck at the door in a panicked effort to sell. Ten years pass and then they wonder why those who have patiently stayed the course are able to retire sooner and spend more on the things they enjoy.

Here’s an actual example from my own life. In 2001, Jeffrey Immelt took over General Electric just four days before the terrorist attacks of September 11th. The United States was about to enter a recession, two wars, and only a few years thereafter, the mortgage and credit crisis. Yet, during the years he’s been at the helm, the company’s net profit has grown from roughly $14.13 billion to nearly $22.5 billion. Earnings per share have grown from $1.41 to $2.20 per share, resulting in the cash dividend nearly doubling from $0.64 to $1.24 per share. The business results have been fantastic. He’s sold off slower growing and lower return businesses and moved into global plays like infrastructure and energy to position the firm for the next ten or twenty years. Despite all of this success, the stock (with dividends reinvested) has performed just under the S&P 500 since he took the helm – up roughly 80%.

The reason is easy to understand: In 2000, just a year before he moved into the executive suite, the stock was trading at $60.50 on earnings per share of $1.29. That means that for every $1 in net profit per share, Wall Street was willing to pay $46.90 – an unbelievable price that hadn’t been seen very often throughout history except for startup companies and those with huge growth prospects such as an early Microsoft. (There is a thing called the “earnings yield” that lets you look at what a stock would be yielding if you thought of it in terms of a savings account. At that level, investors were only buying a 2.13% earnings yield yet taking on all of the risk of stock fluctuations!) Today, the company has trailing earnings per share of $2.15 and investors were only willing to pay $22.50 during the height of the credit crisis. That’s a multiple of 10.47 – or $10.47 for every $1.00 in earnings per share. In other words, investors are only paying 1/4th as much for every dollar of profits that GE produces as they were seven or eight years ago, resulting in an earnings yield of 9.55%.

To put it another way, earnings and dividends have roughly doubled, the business is more competitive going forward, yet the stock is now trading at a fraction of what it was before he took over. Most people can’t stand the volatility so they are their own worst enemy, buying when they should sell and selling when they should buy.

The bottom line is that if you are more than ten years away from retirement and can continually invest regular, fixed amounts in your 401k or Roth IRA to buy shares of quality blue chip stocks or a broad based low-cost index fund, the more the market falls, the more you should consider increasing your contribution percentage. I’ve said it before and I’ll say it again: When you buy a stock, you are buying the future earnings of that company. When the price falls, you are paying less per dollar of profit, which is going to lead to a higher return. For the disciplined investor, most of the real money is made during recessions, depressions, and stock market crashes because you pick up shares of long-term holdings at huge discounts and continue to hold them, compounding your wealth. (How well do you think you would have fared if you bought shares of McDonald’s, Wal-Mart, or Target (which was originally the Dayton Department Store Company) after the Crash of 1987? You’d have very few complaints today.

If you are the type of person that sells out when the market tanks, you are simply transferring your wealth to people like me who sit in an office and figure out what the most attractive assets are and buy them for as cheap as possible. That’s not good for America and that’s one of the reasons I try to give back and help educate people through the Investing for Beginners site at About.com.

More Investing Questions:
Where should beginning investors start?
What about gay couples looking to invest together?
What's the one thing beginning investors should know before they start investing?
What should gays look out for when investing?
Should gay men invest in companies that discriminate?
How can a person calculate their personal level of risk when it comes to investing?