SacramentoExecutive

Henny Penny, The Sky Is Falling!

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Fear and panic selling! Fear and panic selling! That's all I heard last week on CNN, NPR, MSNBC, CNBC, etc. Since October, the Dow Jones Industrial Average has fallen 16.2% from its high of 14,279.96. And the past few days, oh my! The world is about to end! So say the market pundits.

But what is the truth? Since 1945, the market has fallen more than the present decline thirteen times. And what happend after each of these market setbacks? The market recovered each and every time. Imagine that! Did the world come to an end? No. Did the sky fall? No. Should I have jumped off the building and ended my life? No.

So what did happen? Well here are the facts:

1. May 1946, the Dow was at 213. The market fell 23.9% for 38 months until hitting a low point of 162. And ten months later, the market fully recovered.
2. April 1956, the Dow was at 521. The market fell 19.4% for 19 months until hitting a low point of 420. And ten months later, the market fully recovered.
3. January 1960, the Dow was at 521. The market fell 17.4% for ten months until hitting a low point of 566. And seven months later, the market fully recovered.
4. December 1961, the Dow was at 735. The market fell 27.1% for seven months until hitting a low point of 536. And fourteen months later, the market fully recovered.
5. February 1966, the Dow was at 995. The market fell 22.2% for eight months until hitting a low point of 774. And 25 months later, the market fully recovered.
6. April 1968, the Dow was at 985. The market fell 22.2% for 18 months until hitting a low point of 744. And 30 months later, the market fully recovered.
7. January 1973, the Dow was at 1,067. The market fell 46.3% for 21 months until hitting a low point of 573. And 118 months later, the market fully recovered.
8. September 1976, the Dow was at 1,026. The market fell 28.9% for 42 months until hitting a low point of 729. And thirteen months later, the market fully recovered.
9. April 1981, the Dow was at 1,030. The market fell 25.3% for sixteen months until hitting a low point of 769. And two months later, the market fully recovered.
10. August 1987, the Dow was at 2,746. The market fell 36.9% for four months until hitting a low point of 1,733. And twenty months later, the market fully recovered.
11. July 1990, the Dow was at 3,024. The market fell 22.5% for three months until hitting a low point of 2,344. And nine months later, the market fully recovered.
12. May 1998, the Dow was at 9,311. The market fell 20.8% for five months until hitting a low point of 7,379. And two months later, the market fully recovered.
13. January 2000, the Dow was at 11,908. The market fell 39.7% for 32 months until hitting a low point of 7,181. And 50 months later, the market fully recovered.

And my point? The recent decline should not worry the long term investor? Why? It's simple. Long term, the market always makes investors money. My proof:

• January 12, 1906, the Dow Jones hits 100.
• Less than 22 years later, December 19, 1927, the Dow doubles, hitting 200.
• 27 years later, December 28, 1854, the Dow doubles again, hitting 400.
• Less than 10 years later, February 28, 1964, the Dow doubles again, hitting 800.
• Less than 24 years later, February 6, 1986, the Dow doubles again, hitting 1,600.
• Less than 6 years later, January 3, 1992, the Dow doubles again, hitting 3,200.
• Less than 5 years later, November 20, 1996, the Dow doubles again, hitting 6,400.
• Less than 11 years later, April 18, 2007, the Dow doubles again, hitting 12,800.

Pierre Cutler
The Sacramento Executive

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Let's Start Our Engines

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I am all charged up and ready to go for the next round of the Open. My engine is revved and here's what I'm thinking...

1. The market has taken a beating since October and now is the perfect time to go shopping because stocks are on sale. My top two value picks are Cognizant Technology Solutions Corp. (CTSH) and Helix Energy Solutions Group (HLX).
2. A growth stock that has fallen almost 50% (from $43 to $23) since October is Buffalo Wild Wings Inc. (BWLD). I love the fact that at this sports bar and restaurant, the "girls have gone wild'! Sally Smith and her management team (5 out of 7 executives are women) have racked up impressive numbers. Since 2000, revenue has grown from $53.2M to $321M (8-year annual growth rate of 29.3%) and net income has grown from $2.6M to $20.5M (8-year annual growth rate of 34.3%). Under Smith's leadership, the company grew from 35 locations (in 1994) to 493 in December of 2007. The 500th unit will open in February.
3. And then my rock steady company - The Procter & Gamble Company (PG) - a Warren Buffett heavy weight (his fourth largest publicly traded company). Earnings come out on the eve of the start of the contest and I don't expect any surprises. The stock is off ten dollars from its recent high. PG is an innovation machine.
4. My final area will be to focus on the Magic Formula Index which I introduced on my website a little over a year ago. The Magic Formula Index is inspired by "The Little Book That Beats the Market". According to the author Joel Greenblatt, the book may be the only investment book that you will ever have to read. Greenblatt claims an enviable record of 40% annual returns since 1985 in his private investment firm Gotham Capital. In the Little Book (it really is little!), Greenblatt lays out a simple strategy that just seems to work. He contends you should buy 20 to 30 stocks each year with the highest pre-tax earnings yield (the inverse of price to earnings ratio) and the highest return on capital. And so I have five picks from my Magic Formula Index - Biovail Corp. (BVF), Freight Car of America Inc. (RAIL), Korn/Ferry International (KFY), United Online Inc. (UNTD), and ViroPharma Inc.(VPHM).

Pierre Cutler
The Sacramento Executive

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