Solomon Neuhardt Reveals the Best of Value Investing – Part 8

By October of 2008, the stock market had collapsed under the then existing financial crisis. Investors were in a state of sheer terror or panic. Historically, a correction in the stock market precedes a correction in the economy. Transversely, the stock market tends to rise before the economy has rising GDP (or accelerating much more than has been historically true). After the financial crisis of 2007-2008 was over (and long before the economy recovered), the stock market took off. In fact, in 2011 the stock market rose by over 30%. Nonetheless, at the bottom of the financial crisis, most investors were selling in a panic.

A good consistent strategy may be a dividend paying company with a very strong balance that is funded at least 50% by shareholder equity (rather than borrowing the money). A dividend paying business provides for a cushion in a downturn of a market. Furthermore, a business should have a high return on invested capital, such as 15%. This is a high hurdle but ensures that the company is investing wisely. Dividends historically have accounted for half of the returns of the S&P 500. Dividends are normally not associated with small companies stocks but they are available in high quality companies.