Financial Chaos: Why You Need to Own Stocks

Financial Chaos: Why You Need to Own Stocks
By Tom Dyson
Friday, March 26, 2010

Here's a prediction...

Cost of living soars. There's surplus capacity in almost every industry and major corrections are likely. Currencies and bonds lose their purchasing power as governments inflate money supplies. People are hopelessly in debt... 10 times the normal levels. Millions go bankrupt... as do the businesses that extend credit without collateral.

Pretty dire, huh?

Sir John Templeton made these predictions on June 15, 2005. Templeton was one of the top investment legends of the 20th Century, equal in stature to men like J.P. Morgan and Cornelius Vanderbilt from the 19th Century. He built a billion-dollar fortune playing the stock market and selling mutual-fund investments to the public.

 He put these predictions in a memo he wrote from his home in the Bahamas. In short, Templeton believed the peak of prosperity was behind us, dangers were more numerous and larger than at any time in the last 90 years, and countries around the world would experience financial chaos for many years.

The memo was lost and never published. Templeton died in 2008. The note resurfaced a few days ago...

You can read a full version of the lost memo, with some introductory notes by the first journalist to find it, here.

In hindsight, Templeton was right on target in his assessment of the world. The question is, how much more "financial chaos" is there still to come?

My DailyWealth coeditor Steve Sjuggerud thinks we've seen the worst already and the recession is behind us. Templeton says it'll last "many years." My personal observations lead me to agree with Templeton. The main reason is, thanks to the government's huge bailout, none of the excesses Templeton was so worried about have been resolved.

Take the homebuilding industry, for instance. Of all the industries that had overcapacity, the homebuilding industry was one of the worst. It built over 1.5 million new houses per year between 1998 and 2006. In 2005, it built over 2 million new houses. New home sales are currently running around 300,000 a year. In other words, there's almost seven times more capacity than the industry needs.

Yet, so far, not a single major homebuilder has gone bankrupt. The government recently bailed them all out with a massive raft of tax breaks and subsidies. And thanks to the huge stock market rally, they've been able to recapitalize themselves by selling more shares to the public.

Templeton's memo predicted this kind of absurd government support, too. "Voters are likely to enact rescue subsidies," he wrote, "which transfer the debts to governments."

So where does Templeton suggest you put your money to protect it from this financial chaos... Gold? Cash? Bonds?

Nope. Templeton likes stocks. Particularly, he likes businesses with perpetually wide profit margins and operations all around the world:

"Not yet have I found any better method to prosper during the future financial chaos which is likely to last many years," he says, "than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits. Earning power is likely to continue to be valuable, especially if diversified among many nations."   In other words, if you're worried about continuing financial chaos, you should buy stock in Johnson & Johnson, Coca-Cola, Procter & Gamble, Intel, Altria, Philip Morris International, ExxonMobil, and Pepsi...

The beauty of this approach is, if Templeton is wrong and Steve is right, and the worst of our economic troubles are behind us, these stocks will still perform well. You win either way.

Good investing,

Tom.