The Great Reflation: How Investors Can Profit from the New World of Money

Chapter 8. The Stock Market

Everyone ought to be rich.

—John J. Raskob Ladies Home Journal, 1929.

Warren Buffett can testify to how you can get rich in the stock market. However, following the crashes of 2000–2002 and 2008–2009, not to mention 1929–1933, millions of people can testify as to how you can destroy your financial future if you don't know what you are doing.

Buffett not only happens to be a very smart man—extremely knowledgeable about the market, business, and the economy—but he also has a strategy, discipline, patience, and methodology that he sticks to. He avoids fads like the plague, looks for compelling value, does his own homework, and, above all, uses common sense. His approach is micro-based and focused primarily on company selection and owning a piece of the business he invests in for the long run.

Our approach is macro-based and complementary to his. Both require knowledge and discipline, but from different perspectives. As discussed in Chapter 7, our approach focuses, first, on how much of your investable funds you want to have in the stock market as opposed to which companies you should own. Second, it looks at whether you can add value by periodically changing your allocation to stocks when risks and valuation have altered significantly.

Equities, as an asset class, play a key role in investors' portfolios. If selected properly, taking into account risk and value, they can provide growth and the likelihood of dividends that will grow over time. Compounding total ...