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Lindley Estes is a business writer for The Free Lance-Star and This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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Post-crash stocks still bore dividends

ON Sept. 3, 1929, the great U.S. bull market of the Roaring ’20s hit its peak.

All seemed fine and dandy at the time, and plenty of flappers probably hit the speakeasies that night for an illegal drink or two.

But the celebration would be halted less than two months later by a stock market crash that ushered in the Great Depression.

It took more than 25 years for stocks to again hit their Sept. 3, 1929, peak. In other words, the unfortunate soul who invested $1,000 in September 1929 still had that inflation-sapped $1,000 a quarter-century later.

But here’s the silver lining of that tale, which is recounted in Jeremy Siegel’s excellent book "The Future for Investors."

A person who invested that $1,000 in 1929 and then reinvested the dividends over 25 years ended up with $4,400 in 1954. That’s a 6 percent annual return, which outpaced that of bonds.

In fact, the investor who kept investing actually ended up with more money in 1954 because of the crash. The crash allowed that brave person to buy more shares with the reinvested dividends when the market was down, thereby juicing returns when it recovered.

I recount this story not to suggest that it will take the market 25 years to recover from this year’s bloodbath. It’s unknown how long that will take, and anyone who tells you a date is just guessing.

But the story does show the importance of continuing to invest during the downturn. Most people do this automatically with their 401(k)s or IRAs. Each contribution you make now is buying more shares than it did a year ago.

People investing outside these accounts can use the same form of dollar-cost averaging, or investing the same amount every month.

Investing is definitely a leap of faith, as this brutal market has shown. But markets have generally recovered, so it’s important to keep the faith. After all, what’s the alternative? Your mattress probably can’t fund a very long retirement.

What to buy?

So which stocks to buy during this bear market? That is a subject I tend to avoid in this column. Most people are probably better off just buying low-cost index funds or an actively managed mutual fund run by someone whose investment principles make sense to you.

But for those who enjoy the challenge of buying individual stocks, I thought last week’s edition of Barron’s had a very sensible article about what companies seem most attractive these days.

Credit markets are incredibly turbulent, making it hard for companies to borrow money. Thus, Barron’s reasons, companies that generate lots of their own cash and don’t need to borrow are probably well-positioned to weather the storm. Most of these companies also pay a healthy dividend.

Barron’s came up with a list of 25 U.S. companies that generate lots of cash, pay dividends, have stock-market valuations of at least $10 billion and have little debt. Here is the list:

3M, Accenture, Allstate, Altria Group, Aon, Applied Materials, Automatic Data, Baker Hughes, Barrick Gold, CME Group, Coca-Cola, General Dynamics, Hewlett-Packard, Illinois Tool, Intel, Manulife Financial, Merck, Microsoft, NYSE Euronext, Pfizer, Schlumberger, Smith International, Stryker, T. Rowe Price and Tyco Electronics.

Do your research first

Again, none of that is intended as a stock recommendation. Anybody who purchases individual stocks ought to be willing to pore over the company’s financials until they truly understand the firm.

Just look at the example of the greatest investor of our time, Warren Buffett.

I have started reading Alice Schroeder’s 800-plus-page authorized biography of the Oracle of Omaha, called "The Snowball."

So far I’ve made it through Buffett’s college days, and he’s now attending business school at Columbia University. It’s fascinating to learn how long Buffett has been following the companies that Berkshire Hathaway now owns all or part of.

Growing up, Buffett collected discarded bottle caps to find out which soft drinks had the most market share. He sold individual cans of Coca-Cola as well as sticks of Wrigley gum. He delivered papers for The Washington Post. He was fascinated by toy railroads. His father took him to Wall Street and introduced him to an executive with Goldman Sachs, who treated him kindly.

Buffett-philes will recognize that Buffett has now invested massively in each of those companies (Berkshire has a big stake in Burlington Northern Santa Fe Railway). So when he recently made what seemed like a snap judgment to invest $5 billion in Goldman Sachs, it was hardly a spur-of-the-moment thing.

Rather, he’d probably been following Goldman since his father took him there when he was 10. When the opportunity presented itself to invest on seemingly favorable terms nearly 70 years later, Buffett was ready.

Schroeder’s story of Buffett’s introduction to Geico, which Berkshire now owns wholly, will probably be interesting to many in the Fredericksburg area, where the insurer has a regional headquarters.

As a graduate student at Columbia, Buffett learned that his hero, author and renowned investor Benjamin Graham, owned a big chunk of the insurer. Curious to find out about the company, Buffett hopped a train from New York to Washington and showed up unannounced on a wintry Saturday morning.

Buffett knocked on the door and convinced a guard to let him talk to Geico’s financial vice president, Lorimer Davidson, about the company. Davidson agreed, figuring he would do Graham a favor and dispense of Buffett within minutes.

But what followed was a four-hour conversation in which Buffett peppered Davidson with specific questions about how the business worked. When he got back to New York, Buffett sold three-quarters of his stock portfolio and bought 350 shares of Geico.

Over the next several decades, Buffett kept following Geico, and in 1995 Berkshire Hathaway bought the remaining shares that it didn’t already own.

So next time you’re in the market to buy some individual stock, keep in mind the kind of research that people like Buffett are willing to do before diving in.