1. Making Money Stocks
in a Long-Term Bear Market
A Historical Example,
The 1966 to 1982 Bear Market
Deschaine & Company, L.L.C.
© All Rights Reserved
Page 1

2. SINCE DECEMBER 2000 we’ve managed client equity portfolios using the following primary assumption:
1) We’re in a Long-Term Bear Market
1) The history of the stock market is one of long alternating bull and bear market cycles.
In long-term bear markets, investment returns come primarily from income not capital appreciation.
2) Long-term bear markets do not end until price/earnings ratios reach single digit levels.
The stock market’s current p/e ratio is about 13.5 on the S&P 500 index.
3) The stock market is “overvalued” making positive capital returns difficult to achieve.
Protecting principal as price/earnings multiples erode during a long-term bear market is critical to portfolio results.
The Question is:“How do you make money in a bear market?”
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3. The Current Long-term Bear Market (in Red)
3 2000 Stock
45
“Inflation Adjusted” The Dow Jones Industrials Market Peak
As you can see,
Dollars: 1900 — 2008 the highest on record!
40
35
2 1966 Stock
Market
30
Peak
25
1 1929 Stock
20
Market Peak December 31, 2008
15
10
5
D?
A B Our Market Forecast 2000—2035
C
‐
1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
35 Years ?
30 Years 37 Years 34 Years
What did the last Long-term Bear Market look like? . .
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4. The last long-term Bear Market 1966 to 1982 (Standard & Poor’s 500 Index)
The 1966 to 1982 bear market had a 1.07% annual return on capital,
200 2.00
STANDARD & POOR’S 500 1966 to 1982 Bear Market Results
190 1.90
Index Annual
and a 3.49% annual return from dividends. Annual compound total return
1966 1982 Change Return
180 1.80
1.07%
S&P 500 Index at Year End 92.43 109.61 17.18
4.16%. The S&P 500 annual dividend grew from .81 cents to
3.49%
67.70
Dividends Received
170 1.70
4.16%
Total Return 84.88
160 1.60
$1.76 or 4.97% annually. Not very compelling
%
Quarterly Dividend Rate 4.97
0.81 1.76 0.95
150 1.50
returns, wouldn’t you agree?
140 1.40
130 1.30
S&P 500 Index
120 1.20
110 1.10
100 1.00
90 0.90
S&P 500 Quarterly Dividend
80 0.80
70 0.70
60 0.60
50 0.50
40 0.40
Dec‐69
Dec‐74
Dec‐79
Aug‐66
Oct‐70
Aug‐71
Oct‐75
Aug‐76
Oct‐80
Aug‐81
Apr‐68
Apr‐73
Apr‐78
Jan‐67
Nov‐67
Sep‐68
Feb‐69
Jan‐72
Nov‐72
Sep‐73
Feb‐74
Jan‐77
Nov‐77
Sep‐78
Feb‐79
Jan‐82
May‐70
May‐75
May‐80
Jun‐67
Jun‐72
Jun‐77
Jun‐82
Mar‐66
Jul‐69
Mar‐71
Jul‐74
Mar‐76
Jul‐79
Mar‐81
What would have a $1,000,000 earned over this Bear Market? . . .
Page 4

5. Making Money in the 1962-82 Bear Market required patience and regular dividend reinvestment.
$5,000,000 $1,000,000
Yet, over the 16-year bear market a portfolio would have more than doubled from diligently reinvesting
$4,500,000 $900,000
a growing dividend. In addition, portfolio income would have grown at a healthy 10.48% annual rate from
$4,000,000 $800,000
$29,428 a year in 1966 to over $144,986 by year end 1982.Remember these returns are earned
$3,500,000 $700,000
from passively investing in the S&P 500, which includes over 130 stocks that don’t pay a divi-
dend! What would happen if we eliminated the 130 stocks that don’t pay a dividend?
$3,000,000 $600,000
$2,500,000 $500,000
Green: Cumulative capital return
Blue: Cumulative investment, $1 million initial investment and all reinvested dividends
$2,000,000 $400,000
Yellow line: Quarterly dividend income
$1,500,000 $300,000
$1,000,000 $200,000
$500,000 $100,000
$‐ $‐
Nov‐66
Nov‐67
Nov‐68
Nov‐69
Nov‐70
Nov‐71
Nov‐72
Nov‐73
Nov‐74
Nov‐75
Nov‐76
Nov‐77
Nov‐78
Nov‐79
Nov‐80
Nov‐81
Jul‐66
Jul‐67
Jul‐68
Jul‐69
Jul‐70
Jul‐71
Jul‐72
Jul‐73
Jul‐74
Jul‐75
Jul‐76
Jul‐77
Jul‐78
Jul‐79
Jul‐80
Jul‐81
Mar‐66
Mar‐67
Mar‐68
Mar‐69
Mar‐70
Mar‐71
Mar‐72
Mar‐73
Mar‐74
Mar‐75
Mar‐76
Mar‐77
Mar‐78
Mar‐79
Mar‐80
Mar‐81
Mar‐82
Anything we could do to enhance our returns? . . .
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6. Yes! Step One: Eliminate S&P 500 Stocks that don’t pay a dividend.
$10,000,000 $1,500,000
If we simply eliminate the stocks in the S&P 500 that don’t pay a dividend, the portfolio’s dividend $1,400,000
$9,000,000
yield goes from 3.05% in 1966 to 4.55%. The annual dividend growth rate goes from 6.12% to a $1,300,000
$8,000,000 $1,200,000
healthy 11.19%. As a result, the portfolio’s quarterly income grows at a healthy 23.32% from $1,100,000
$7,000,000
$43,908 annually to over $1,256,634 per year. $1,000,000
Which works out to an annual compounded total return from 1966 to 1982 of 12.13%!
$6,000,000 $900,000
$800,000
$5,000,000
$700,000
$4,000,000 $600,000
$500,000
$3,000,000
$400,000
$2,000,000 $300,000
$200,000
$1,000,000
$100,000
$‐ $‐
Jul‐66
Jul‐67
Jul‐68
Jul‐69
Jul‐70
Jul‐71
Jul‐72
Jul‐73
Jul‐74
Jul‐75
Jul‐76
Jul‐77
Jul‐78
Jul‐79
Jul‐80
Jul‐81
Nov‐66
Nov‐67
Nov‐68
Nov‐69
Nov‐70
Nov‐71
Nov‐72
Nov‐73
Nov‐74
Nov‐75
Nov‐76
Nov‐77
Nov‐78
Nov‐79
Nov‐80
Nov‐81
Mar‐66
Mar‐67
Mar‐68
Mar‐69
Mar‐70
Mar‐71
Mar‐72
Mar‐73
Mar‐74
Mar‐75
Mar‐76
Mar‐77
Mar‐78
Mar‐79
Mar‐80
Mar‐81
Mar‐82
Is there anything else we could do to enhance our returns? . . .
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7. Enhancing Return: STEP TWO: Manage Stock Selection and the timing of dividend reinvestment
$15,000,000
We can identifying high yield stocks with a history of dividend growth (and good future
$3,400,000
$14,000,000
$3,200,000
prospects of increasing dividends) and selectively reinvest dividends periodically in the
$13,000,000 $3,000,000
$12,000,000 $2,800,000
stocks in the portfolio with the highest current yield. We believe this step will add an $2,600,000
$11,000,000
additional 1% in annual yield. We also we can increase the annual dividend growth rate an $2,400,000
$10,000,000
$2,200,000
additional 1% per year.. Now our annual dividend yield is 5.55% and our annual dividend
$9,000,000
$2,000,000
$8,000,000
growth rate 12.26%. Annual income grows 28.95% and the portfolio’s total annual re- $1,800,000
$7,000,000 $1,600,000
turn: 16.10%. Since 2000, our EIP: Dividend Yield: 6.20%.
$6,000,000 $1,400,000
Annual dividend growth rate:14.45%, and annual total return 9.50%.
$1,200,000
$5,000,000
$1,000,000
$4,000,000
S&P 500 annual total return: -2.90% over the same period! $800,000
$3,000,000
$600,000
$2,000,000
$400,000
$1,000,000 $200,000
$‐ $‐
Nov‐66
Nov‐67
Nov‐68
Nov‐69
Nov‐70
Nov‐71
Nov‐72
Nov‐73
Nov‐74
Nov‐75
Nov‐76
Nov‐77
Nov‐78
Nov‐79
Nov‐80
Nov‐81
Jul‐66
Jul‐67
Jul‐68
Jul‐69
Jul‐70
Jul‐71
Jul‐72
Jul‐73
Jul‐74
Jul‐75
Jul‐76
Jul‐77
Jul‐78
Jul‐79
Jul‐80
Jul‐81
Mar‐66
Mar‐67
Mar‐68
Mar‐69
Mar‐70
Mar‐71
Mar‐72
Mar‐73
Mar‐74
Mar‐75
Mar‐76
Mar‐77
Mar‐78
Mar‐79
Mar‐80
Mar‐81
Mar‐82
A Stock Selection and Dividend reinvestment example:
Page 7

8. Here’s how We Reinvest Dividend Income: ALTRIA CORP Dividend &Yield History March 1980 through December 2008
12% $1.30
NOTE: As of December 31, 2008, All date includes Kraft and Phillip Morris International $1.20
11%
MO was a buy (or an addition to with new cash) as its dividend yield (5.0%) was above it’s 5-year aver-
$1.10
age 4.5%. (As was KRT and PM) A current yield above the green line is a screaming BUY!
10%
$1.00
9%
$0.90
8%
MO Dividend Yield: $0.80
Above 5.3% Is a Strong Buy Signal
7%
$0.70
6%
$0.60
BUY
5%
$0.50
HOLD
4%
SELL $0.40
3%
$0.30
Quarterly $ Dividend (right axis)
2% $0.20
Dividend Yield is quarterly dividend rate annualized, divided by month end
1% $0.10
share price. The peak? March 2000 when tobacco litigation concerns depressed MO’s stock price.
0% $-
Mar‐96
Mar‐97
Mar‐98
Mar‐99
Mar‐00
Mar‐01
Mar‐02
Mar‐03
Mar‐04
Mar‐05
Mar‐06
Mar‐07
Mar‐08
Mar‐80
Mar‐81
Mar‐82
Mar‐83
Mar‐84
Mar‐85
Mar‐86
Mar‐87
Mar‐88
Mar‐89
Mar‐90
Mar‐91
Mar‐92
Mar‐93
Mar‐94
Mar‐95
Want to really juice portfolio returns? . . .
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9. Throw More Money at the Portfolio: STEP FOUR: Invest Regularly and Often
$15,000,000
When it comes to investing, nothing beats the simple magic of compounding! Throwing money into the $3,400,000
$14,000,000
$3,200,000
portfolio to augment the cash flow from a growing dividend exponentially increases an investor’s return.
$13,000,000 $3,000,000
Adding $10,000 a quarter to our $1 million initial deposit grows the portfolio’s annual dividend
$12,000,000 $2,800,000
$2,600,000
$11,000,000
income from $53,662 in 1966 to over $3,389,918 MILLION in 1982. That’s an annual income $2,400,000
$10,000,000
growth rate of 29.58%!! As a result, annual total return jumps to 16.66%. This example
$2,200,000
$9,000,000
$2,000,000
demonstrates the power of steady and growing cash flows regularly reinvested
$8,000,000
$1,800,000
$7,000,000 $1,600,000
at bear market prices.
$6,000,000 $1,400,000
The bear market advantage: Capturing higher dividend yields as prices decline! $1,200,000
$5,000,000
$1,000,000
$4,000,000
$800,000
$3,000,000
$600,000
$2,000,000
$400,000
$1,000,000 $200,000
$‐ $‐
Jul‐66
Jul‐67
Jul‐68
Jul‐69
Jul‐70
Jul‐71
Jul‐72
Jul‐73
Jul‐74
Jul‐75
Jul‐76
Jul‐77
Jul‐78
Jul‐79
Jul‐80
Jul‐81
Nov‐66
Nov‐67
Nov‐68
Nov‐69
Nov‐70
Nov‐71
Nov‐72
Nov‐73
Nov‐74
Nov‐75
Nov‐76
Nov‐77
Nov‐78
Nov‐79
Nov‐80
Nov‐81
Mar‐66
Mar‐67
Mar‐68
Mar‐69
Mar‐70
Mar‐71
Mar‐72
Mar‐73
Mar‐74
Mar‐75
Mar‐76
Mar‐77
Mar‐78
Mar‐79
Mar‐80
Mar‐81
Mar‐82
A critical part of the return equation? Patience!
Page 9

10. The last long-term Bear Market 1966 to 1982 (Standard & Poor’s 500 Index)
The Results of a $1,000,000 investing in the S&P 500 on December 31, 1965 and all dividends reinvested
STANDARD & POOR’S 500 1966 to 1982 Bear Market Results
Select Dividend Stocks Select Dividend Stocks,
S&P Dividend and Time Dividend Time Dividend Reinvestment
S&P 500 Stocks Only Reinvestment Plus $25,000 per Quarter
Beginning Dividend Yield (YE: 1965) 3.51% 4.55% 5.50% 5.50%
Average Dividend Yield 4.10% 5.60% 6.60% 6.60%
Annual Dividend Growth Rate 6.12% 11.19% 12.26% 12.26%
Annual Capital Return 1.07% 1.07% 1.07% 1.07%
Beginning Annual Income $ 29,428 $ 43,908 $ 53,662 $ 53,662
Ending Annual Income $ 144,986 $ 1,256,634 $ 3,134,960 $ 5,684,536
Ending Portfolio Market Value $ 2,290,593 $ 6,246,914 $ 10,890,069 $ 19,746,656
Annual Compounded Rate of Return 5.32% 12.13% 16.10% 16.66%
Total Invested Capital $2,050,365 $ 6,198,952 $ 11,327,048 $ 18,968,672
Total Dividends Received $ 1,087,090 $ 5,198,952 $ 10,327,048 $ 17,968,672
Total Capital Return $ 240,228 - $ 49,962 - $ 436,979 $ 777,985
Current Yield on Invested Capital 7.07% 20.11% 27.68% 29.97%
S&P 500 Dividend Yield 1982 6.42%
What would have a $1,000,000 earned over this Bear Market? . . .
Page 10