During the 1932-1933 period, General Mills (NYSE:GIS) had a dividend yield over 7%. Procter & Gamble (NYSE:PG) had a dividend yield of over 8%. Heck, IBM was yielding over 8%. Talk about a once in a lifetime opportunity! There's a reason why Warren Buffett famously advised investors to "be fearful when others are greedy and greedy when others are fearful." There's a reason why Baron Rothschild said "the time to buy is when there is blood in the streets." Just look at his currency bets on the London Stock Exchange during the Battle of Waterloo (although having inside information surely helped).
When you look at the moves that really advance someone's financial house, it almost always involves the intelligent allocation/infusion of capital during times of severe economic malaise. Take Charles Tiffany, for example. Most of us have probably heard of the famous jewelry store that bears his name. Fortunately for a young Charles, his father regularly had cash on hand to lend his son. This enabled Charles to take advantage of trouble in Europe during the 19th century by purchasing Marie Antoinette's girdle of diamonds and then going on the offensive to buy the diamonds owned by the estate of the late Hungarian prince Esterhazy.
Most other American jewelers were not interested because of the 50% decline in diamond prices. Charles, meanwhile, got his hand on some capital (courtesy of his father) and made the kind of purchase that helped cement Tiffany as a jewelry powerhouse. The heroes of this story are Charles's father (for having the money necessary to seize the opportunity) and Charles (for having the undaunted ambition to pursue a once-in-a-lifetime opportunity that put the jewelry store on the path to being a powerhouse for centuries to come).
Once you realize that the big money gets made during times of severe economic distress, the next question becomes: How do you put yourself in a position to benefit from that realization?
I devote a lot of my writing efforts on Seeking Alpha by explaining the advantages of stuffing your portfolio with the no-nonsense blue-chip stocks like Colgate-Palmolive (NYSE:CL), Coca-Cola (NYSE:KO), and Johnson & Johnson (NYSE:JNJ). These companies are the backbones of pensions, trust funds, and the mutual funds of 401(k) plans across the country. These businesses make profits in dozens of currencies, and have 50+ year records of rewarding shareholders with a dividend increase every year. When you look at the annual earnings results from these three firms, it is almost impossible to find any five-year rolling period in which earnings per share actually declined.
What is the greatest joy for me when it comes to writing about excellent businesses such as these? The probability that if the stock price decreases, the earnings power of the firm has likely not decreased by a commensurate amount. For most companies out there, we cannot say with high certainty that a decline in price automatically translates into better value. After all, if a company's stock price falls by 60% but its earnings power has fallen by 80%, then the stock has actually gotten more expensive as it has slid downward.
But there is an important characteristic that Johnson & Johnson, Colgate-Palmolive, Coca-Cola, and a small block of other businesses share: when the share price falls by 25-45% (such as during the Great Recession of 2008-2009), the long-term earnings power of these companies did not fall by 25-45%. This means that, during the crisis, these stocks did indeed get cheaper. These were not quite Great Depression Era prices, but you could have done your future self quite a favor by purchasing a nice chunk of Coca-Cola stock at $19 in 2009 and tucking it away for 15+ years.
I'm not saying, by the way, that these three companies are the best investments in the world during a crisis. In this past financial crisis, it would have been really nice to buy Bank of America (NYSE:BAC) at $3 per share or Wells Fargo (NYSE:WFC) at $8 per share. The difficulty with those two, of course, is that you need to have the skill in reading bank statements to recognize the survival ability of Bank of America and Wells Fargo compared to a company like Wachovia that effectively bankrupted shareholders, despite its previous record of financial strength and having $40 in book value before the crisis struck.
It took a level of experience, insight, skill, and luck (I mention luck because it is difficult to guess ahead of time which banks received financial rescue packages and which were left to fend for themselves) to be a bank investor during the financial crisis that was not necessary to be a successful investor in Coke, Colgate, or J&J.
Since it is my personal preference to be a net accumulator of shares (rather than a seller), and because I choose to invest in companies that have high likelihoods of maintaining long-term earnings power when enduring sharp price declines, I can put myself in a position to welcome a stock market correction so I can buy more. Negative price changes only matter when they truly reflect a decline in a company's earnings power. But if you deal only in companies that have the strongest earnings power, then you can put yourself in a position to welcome a stock market correction because a 35% stock market decline may have little to do with the kind of earnings growth that a company like McDonald's (NYSE:MCD) will generate 10+ years from now. You do not have to be Warren Buffett, Baron Rothschild, or Charles Tiffany to put yourself in a position to make lucrative decisions when pricing declines materialize.