How to Get Rich in a Boring Market

Bull statueBy Dan Caplinger, The Motley Fool

Whether stocks are soaring in a big bull market or plummeting in response to crisis situations, you can find strategies that will help you profit from big moves in either direction. What's really challenging, though, is figuring out what to do when markets stand still. With the right investment strategy, you can take inevitable doldrums in stocks and ride them to riches.

Dealing with Sideways Markets
In this month's brand new issue of the Fool's Rule Your Retirement newsletter, which hits the digital presses today at 4 p.m. ET, guest interviewer and Hidden Gems co-advisor Andy Cross took the opportunity to talk with Vitaliy Katsenelson, author of the book Active Value Investing and director of research at Investment Management Associates. In the interview, Katsenelson shares some insight on how financial markets work and how investors can take advantage of their quirks.

In particular, Katsenelson draws a contrast between the way markets should behave versus how they do behave. Theoretically, rational investors should expect modest, steady growth, with share prices going up in a gently sloping line without the bumps and dips that we've seen so much of lately.

Instead, investors act irrationally, going through cycles of optimism and pessimism that distort stock values. During long-term secular bull markets, investors bid stocks up, pushing price-to-earnings multiples way above their historical norms to levels that are unsustainable in the long run. Those markets produce huge returns for stocks, as they benefit not only from underlying fundamental growth but also from the multiple expansion that puts a higher price tag on every dollar of earnings a company generates.

Conversely, when investors get more pessimistic, it often leads to sideways performance for stocks even when the underlying fundamentals of individual companies are largely unchanged. For instance, fellow Fool Morgan Housel last year highlighted five companies whose earnings had doubled even as their stock prices went nowhere, including Johnson & Johnson (JNJ) , WellPoint (WLP) , and Google (GOOG) . Once earnings multiples get to a certain point, they start to contract -- which causes stock prices to stagnate even if profits continue to grow.

How to Handle Sideways Markets
Sideways markets can obviously be incredibly frustrating for investors, especially when the companies they've invested in seem to be firing on all cylinders. Anyone who's been sitting on dead money since the 1999-2000 bull market top can sympathize with flat to negative returns despite some decent economic growth. Moreover, after the huge stock market bounce that has seen the S&P 500 double since early 2009, Katsenelson sees the current sideways market being only half over. Although multiples based on future earnings estimates don't seem unreasonable, they're based on record-high profit margins -- margins that are likely unsustainable over the long run.

To make sure you put yourself in the best position to profit, you have to make the right moves. One recommendation that Katsenelson makes is to invest in dividend-paying stocks. As survivors of the lost decade have discovered, dividends can turn a flat portfolio into a profitable one, and Katsenelson points out that during sideways markets, dividends account for more than 90% of total stock returns.

That philosophy suggests dividend stocks with cheap valuations and without big run-ups in price might do best. For instance, defense stocks Lockheed Martin (LMT) and General Dynamics (GD) may fit the bill, with pessimism over potential budget cuts overshadowing their profitability and low earnings multiples. Similarly, value plays like energy giant Total (TOT) and France Telecom (FTE) also have healthy payouts that can give you good returns even if share prices stay flat.

Get More Tips
Going with dividend stocks is just one of the five strategies that Katsenelson discusses in the new Rule Your Retirement issue. You can read about all of them in the new issue, which you can access through the Fool's free 30-day trial offer. Trial subscribers get not only the new issue but also access to all of Rule Your Retirement's other resources.

Sideways markets may be boring, but how you handle them will make a huge impact to your long-term returns. If you can stay rational and seek out inevitable bargains, then boring markets may become your favorite markets.

Fool contributor Dan Caplinger never finds investing boring. He doesn't own shares of the companies mentioned in this article. Google, Johnson & Johnson, and WellPoint are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers selection. France Telecom, Johnson & Johnson, and Total are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of General Dynamics, Google, Johnson & Johnson, and Lockheed Martin. Motley Fool Alpha LLC owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy keeps things interesting.

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Major Fraud Alert

The entire Federal Banking System under FirstGov has been "Consumed" and "Levied" by way of a Maryland State Circuit/District Court Ruled “Appropriation and Garnishment” of all Future Earnings prior to and after 2004 against Bank Of America by way of the F.D.I.C. Regulations Prohibiting failing Banks from Merging with other failing Banks between the Dates of 08/04/08 and 10/09/09.

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May 29 2011 at 12:17 AM Report abuse rate up rate down Reply


April 12 2011 at 6:20 AM Report abuse rate up rate down Reply

Anybody who is rich is not going to tell you their secret on how they got rich.They wont even sell it to you because they dont like competition.

April 11 2011 at 3:43 PM Report abuse +1 rate up rate down Reply

Easy...steal,rob, know, just like the Gov. and Politicians do....

April 11 2011 at 2:57 PM Report abuse rate up rate down Reply

Sideways markets? Who invests in 'the market' ? People invest in stocks or funds and generally in certain sectors (tech, commodities, financial, etc.).

Who has not heard that gold and silver have soared? Nobody has paid more and more for gasoline or food? Are they so ignorant as to NOT what funds represent investment in corn's increasing price, or gold's or silver's?

How about the 'emerging markets'? Nobody thought to find and invest in the funds that track them?

Gimme a break; if you don't have enough sense to use Google or find an adviser that gets paid by a fee versus commission, you're going to lose money!

April 11 2011 at 1:52 PM Report abuse rate up rate down Reply

Go in knowing that the "market" is a legal form of gambling, with the "house" being the big players, and you just a peon. Don't gamble/invest more than you can afford to loose. Know when to get up and walk away, and do it before everyone else begins to run. Just like a casino, the market wasn't built for you to win.

April 11 2011 at 1:31 PM Report abuse rate up rate down Reply
winc4us's no longer about the people. government is for government, tsars, special interests, the elite, the insiders, the brown, GE, Fanny Mae, Freddy Mac, AIG, ... the big corps in bed with big gov pay very little in taxes and we, the middle class GE..that's right..General Electric paid no taxes this year..and actually recieves kick backs for "green" investments. For the people? I hope there will be change soon.

April 11 2011 at 11:50 AM Report abuse +2 rate up rate down Reply

It's the get rich quick and greed mentality that has gotten this country into trouble forever. How about we get rid of Wall Street?

April 11 2011 at 11:48 AM Report abuse rate up rate down Reply
1 reply to sgard206's comment

You can't.

April 11 2011 at 3:44 PM Report abuse +1 rate up rate down Reply

All this talk about the great budget compromise and plans to reduce our debt are a lot of baloney. We are already bankrupt and well on the path of financial ruin. The American people are being BOTH parties of Congress, the current administration, and by the media who don't report the facts and truth.

Now let's put all the headlines making it appear that something great was accomplished with a budget compromise, and BS aside, and look at the REAL facts. The budget is a whopping, unbelievable, $3.83 billion for one year! Built into the budget is a KNOWN $1.56 trillion deficit in one year. In reality it will be even more than that. What this means is that our current $14.3 trillion national debt will skyrocket, with interest, to OVER $16, BILLION! Did you know that we paid $413 billion in interest last year alone? That we have paid $8 trillion in interest since 1988? And that by the year 2021 we will be paying $1.1 trillion in interest?? Our Washington representatives have pushed America to the brink of economic ruin.

This so called compromise is nothing more than a fraud placed upon all Americans. The fact is, the $38 billion budget cut is LESS THAN 1% of the budget of $3.83 trillion, nothing more than a spit in the ocean...or better, a spit in OUR faces. This is the deal that our representatives made. Then further, to claim that $500 billion will be saved over 10 years is a further insult, since on a relative scale this is almost nothing compared to the trillions of dollars of debt that will accumulate over this same period of time, driving our national debt to WELL OVER $20 trillion during this period of time.

THIS IS ALL BASIC ARITHMETIC, PEPOLE! . But the American people are allowing themselves to be fooled by the administration, both parties in Congress, and by a media that doesn't do their job and report the facts and truth.

The only thing that will save America at this point are massive cuts in spending, and a major downsizing of the federal government which is now totally out of control.

I PLEAD with you to wake up, write and call your representatives IMMEDIATELY, write Letters to the Editor, voice your complaint, and in 2012 vote those who are responsible, of both parties, out of office. Do it peacefully, within the law, but exercise the full extent of your freedoms guaranteed by our Constitution, and with you vote.

Your action is our only chance left. Those in Washington will NEVER get us out of this path toward financial ruin that will most certainly occur. IT IS NOW TOTALLY UP TO YOU.

April 11 2011 at 9:56 AM Report abuse +2 rate up rate down Reply

Dcnashinsc......Yes, you can stick with basically "blue chip stocks"....But i might add, several that were in the past (GM), Went to junk and people lost money....And i know one lady who lost 750k in the market 10yrs ago and was in low risk investments.....So you can lose....And if they are firing around 5 and 6 in this market, over the yr, that isnt bad.....Im surprised if they are and havent check them out lately....But i will take your word......I know several people who are ex well off, and i can tell you, they pulled there money out of ALL THE MARKETS....Might not tell you something, but it sure does they ought to know, there worth millions.....But good luck to you......

April 11 2011 at 1:15 AM Report abuse +1 rate up rate down Reply