From this time on this blog will give strictly money advice to the readers. This blog is for entrepreneurs, but entrepreneurs need to know how the market works and how to utilize money in different markets. Remember diversification is a key if you don’t want to get burned. We want you to succeed in the long run. This blog is not here for you to make quick cash. Please read the information thoroughly as it is written by a guest author who is well known for saving money in various markets.

These are troubled times indeed.  The unemployment rate is rising and families are being kicked out of their homes.  Inflation is out of control and I can’t even afford a full tank of gas.  The only good news I’ve had recently is that Paris Hilton came to my hometown and I didn’t catch anything (yet).  Despite the countless hours of bad news heard on the news stations, this is not a time to despair.  In fact, it may be time to rejoice.

Of course, not everybody is rejoicing.  Short-term investors who tried to ride the surging wave of the Dow last year are now sitting in a pool of despair.  Their supposed “stars” of their portfolio are now seen as junk.  But as the old saying goes, “One man’s garbage is another man’s treasure.”

The market has seen rough times like this before and has always rebounded to a level higher than before.  It is the way the market works.  During the boom, people that couldn’t even get a Sears card were getting $150,000 adjustable rate loans for houses.  It doesn’t take a rocket scientist, or even a good economist really, to predict that once the economy slowed down, these “homeowners” would be in serious trouble.  The housing market crashed and the aftershocks touched us all.

Of course, there is more to the sagging economy than a dismal housing market.  It is simply a point that the market has its ups and downs.  And that is where the bright side is.  Instead of thinking of the current situation as a gloomy situation, look at it for what it really is: a tremendous opportunity.  Drawing upon the wisdom of some of finance’s greatest minds, here is a little game plan to help to wade through this market and find the real bargains created during the recent slide.

Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it. -Peter Lynch

This is sound advise from the former Fidelity Magellan fund manager.  While this may seem like a knock on senior management (and it is), what Lynch is also trying to convey is to invest in what you understand.  I have researched a company that has developed an artificial heart that will sufficiently replace a person’s malfunctioned heart.  The idea of a corporation producing miracles sounds amazing and profitable, but the reality is unless you completely understand the company and its competitors, it will be difficult to be successful.  This is because everybody has the same information and chances are more people are better educated in this field.  The reality is that the hype of a company is built in to the stock price and the price of miracles is readily available in your ticker.  Invest in boring companies with solid fundamentals that you understand.  McDonald’s is not the most exciting pick, but you understand that they make burgers and you know they sell more than anybody else.

Ninety-seven percent of all returns from the stock market have come from dividend reinvestment.  Only three percent is attributed to capital appreciation. -Jeremy Siegel

The research done by Prof. Jeremy Siegel proves that the most substantial plan to stock market success come from dividend reinvestment.  This holds especially true in a time of falling prices.  Dividend rates fall far slower than stock prices, and consequently dividend yields rise.  Following the principles of Buffet and Lynch, you’ve already found a respectable company that you understand and plan to own for the long term.  What a recession grants to the long-term investor is the ability to reinvest dividends in to their stocks at a significantly lower price than normal.  When the market begins to rebound, the yield obtained during the recession is magnified as the additional shares purchased cheaply through dividend reinvestment begin to appreciate.

Yes, times are tough.  It is the first real economic challenge we have had in quite some time.  Just remember, despite what the newscasters tell you, this is not the end of the world.  The market pays you for the risks you take- and now is as risky time as ever.  You may buy what you consider a bargain and watch it fall to half its value overnight.  Don’t panic.  The market is just a reflection of the current value of a company, but you aren’t interested in that.  We are long-term investors.  We know better than that.

This article was contributed by Jared Fischer who can be reached at jfisch23@slu.edu. 

If you have any questions, ideas, or suggestions please email us at questions@businessonthemound.com.

Tags: Money Talks

This entry was posted on Monday, February 25th, 2008 at 1:25 pm and is filed under money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.