A Cautionary Tale of “Safe”, Blue Chip, Dividend Stocks…..In Greece

Everywhere you look these days, the advice given on what to do with your money is to just buy stocks in general, and dividend stocks in particular. I agree with the idea of buying the stocks of companies that actually give you a portion of their earnings every quarter. What I don’t agree with is the idea that any time is a great time to put all your money in these stocks. They say just close your eyes and buy the index of big, safe, blue chip stocks and you will beat the performance of 90% off all the teams of money managers out there forever. Can it really be this easy?

Here is what happened to one investor who tried to do this in Greece:

I was visiting Greece a few weeks ago and was talking with a relative of a relative of mine. I don’t want to give any identifying details on this person but I will give you an idea of what kind of person this is. This man, I will call him Manos, is over 85 years old and is still very active and sharp as a whip. He has had a long impressive career as a medical specialist for a few years in the US and many more in one of the top hospitals in Athens. He has a very nice family, wife, kids, grandkids, and enjoys spending time with them.  As a doctor in Greece, he made a good salary for Greece although I don’t know the details. What he did tell me was about his investment a few years ago of his retirement money into Greek stocks. Manos was not buying risky penny stocks or companies with no earnings. He bought the stocks of the biggest banks in Greece that paid what he thought to be solid, safe dividends that he can rely on in his retirement.

Most people don’t follow the Greek stock market but know from the news that Greece has a lot of economic problems. So how bad are their problems? I don’t know exactly, but I know that they are bad enough that virtually all the bank stocks that Manos bought are down 95% or more. One of the bank stocks he mentioned went from around 40 Euros to about 0.13 Euros. He started with over 300,000 Euros and now has less than 10,000 Euros. How does someone, let alone someone in his eighties, come back from that loss? The short answer is that you can’t.

In 2007 the index was above 5000. In 2016 the index was below 500. A 90% decline.In 2007 the Greek Stock Market (ASE) index was above 5000. In 2016 the index was below 500. A 90% decline.

 

Poor Manos, but that is Greece.  It can’t happen in the US right?

Yes and No. The US is in a different situation from Greece with respect to printing our own currency. As far as having companies that go bankrupt when the economy turns bad, we are in the same boat. Investors that came of age and into investing in the last 8 or so years have only seen a rising stock market.  People have a short memory. How many people remember that Citibank today is really about 90% lower than where it was before the financial crisis? How can that be? Citibank is trading around $40 a share. Yes, that is after they had a 10 for 1 reverse split.  And in case you don’t know what a reverse split is, it is like Photoshop for ugly stocks.

CITIGROUPIn 2007 Citigroup was above $500. In 2016 it is $44. An over 90% decline.

Bank of America

In 2007 Bank of America was above $50. By 2009 it fell below $5. Another 90% decline. Today’s price is still down over 65% from the 2007 high.

     So what are you suppose to do, never buy stocks and just live in an underground bunker with 30 years worth of lentil beans?  No, but don’t put every dime of your resources into stocks at nosebleed levels when everyone is chasing yield and piling into anything with a 2% or better yield and a downside risk of 30-50%. Go and buy some low fee ETFs or like Vanguard’s VT or VTI or something similar. But also have money in other things like some real estate, precious metals, and cash. If you are loaded up to your eyeballs in stocks, when they fall (and they will), not only will you not have money to buy them much cheaper, but you will most likely be selling at the bottom. It’s human nature.