The real question with the great recession remains: Is this going to be a short one (like they usually are) or whether the double whammy of an inflated stockmarket followed by an inflated housing market followed by the central bank dropping rates is going to work any different than it did in Japan who proceeded along exactly the same course as the US has currently chosen. This graph shows how the Nikkei 225 (compare to the S&P500) has been doing over the past 18 years. Needless to say index investors have not had a good time. Those who started indexing at age 24 are now 42 years old and have 18 years left to reach their retirement savings goals. If things turn around right now (doesn’t look like it though), they may have 1.5 market cycles left before they retire and they got a lot of catching up to do.

Still even if an index is in a trading range and the general economy is in a funk, individual companies can still do well. Remember that recessions are usually localized in sectors (presently financials, consumer discretionary and homebuilders). Now it is indeed sad that the government acts against prudent investors by further devaluing the dollar to grab votes and save their own budget. The only strategy I can think off is to keep buying domestic companies with low P/B (*) or non-cyclic companies with a depressed P/E.

(*) Be careful that the book value does not contain too many intangibles and that it is not in danger of being written off. For instance, home builders who currently sport very low P/B have also been writing down their book values.

As always, I am not a financial advisor and this is strictly my opinion.

Originally posted 2008-02-04 06:43:29.