TAG | Rate of return
by Alexander Green, Investment U Chief Investment Strategist
Monday, January 02, 2012: Issue #1677
Investors are scared right now and it’s not hard to see why.
Economic growth is anemic. Unemployment is high. Banks are saddled with toxic assets. Problems in the Eurozone continue to fester. Residential real estate is sinking in a mire of short sales and foreclosures. And both federal and state governments – not to mention consumers themselves – are drowning in a sea of red ink.
We have all heard these negatives repeated daily and cycled endlessly in the national media.
However, these reports often leave out or play down the good news: Inflation is low. Short-term rates are near zero. Energy and food prices are declining. Emerging market economies – which are end markets for the developed world – are still booming. Corporate profits are at an all-time record – and have been for seven quarters now. And stock valuations are low. (The S&P 500 has historically traded at an average of 16 times earnings. Today it’s less than 14 times earnings.)
Last year I shared another key insight with you. It has always been a positive indicator for stocks when the Dow yields more than Treasury bonds.
This makes sense when you think about it. Shares are riskier than bonds. Investors should demand a higher yield. Yet almost never since 1958 have stocks yielded more than Treasuries. Today they do, however. The 10-year bond yields just two percent. The Dow yields 30 percent more.
If you’re still not convinced that equities are a good place to be in 2012, let me draw your attention to one of the strongest indicators of all…
Contrarian Investing Works
It’s a truism that no one consistently predicts the stock market. (That’s why money manager and Forbes 400 member Ken Fisher calls it “The Great Humiliator.”) However, there’s a straightforward system that offers a reasonable prospect of timing the market reasonably well in the future.
A 25-year study published last year in The Journal of Financial Economics found that if you had simply invested in the S&P 500 when equity fund flows were negative (redemptions exceeded new investments) and into 90-day Treasury bills when fund flows were positive (new investments exceeded redemptions) you would have substantially outperformed the market while spending nearly half the time in riskless T-bills.
In other words, contrarian investing works. This system would have you do the very inverse of what the great mass of investors is doing. (It turns out they have god-awful instincts, so it pays to buck the consensus.)
Bear in mind, if you’d followed this system, you wouldn’t just have earned higher returns than being fully invested. You would have done it with far less risk, spending nearly half the time in riskless T-bills.
I mention this because the Investment Company Institute recently reported that investors are yanking billions out of equity funds virtually every week and pouring the money into ultra-low-paying money market accounts. The Wall Street Journal further reports that “investors have continued to consistently pull money from U.S. equity funds since August.”
I’m trying to contain my glee. Who says no one rings a bell in the stock market?
The fear and pessimism about both the economy and the stock market are way overdone and fully discounted in current stock prices. If you can’t be stirred by low interest rates, low inflation, low valuations and record profits, you really should ask yourself two important questions:
1. Is logic or emotion governing my decision making about my portfolio?
2. If I don’t invest in stocks – the greatest wealth creator of all time – how am I going to meet my long-term financial goals?
We’ll talk more about these issues in the weeks ahead. But, for the record, I think 2012 will be a good year for the stock market and – although virtually no one expects or believes it – perhaps even a barnburner.
Good Investing,
Alexander Green
15
The One Place to Invest for Growth, Income… and Safety
0 Comments | Posted by Alexander Green in Alexander Green
The One Place to Invest for Growth, Income… and Safety
by Alexander Green, Investment U Chief Investment Strategist
Monday, November 14, 2011: Issue #1642
Eight weeks ago, I wrote an Investment U column pounding the table for dividend stocks. Since then, they’ve ratcheted higher, but I still see plenty of upside ahead.
Someone who shares my enthusiasm for high-yield stocks right now is my friend and former colleague Rick Pfeifer, Senior Portfolio Manager at Fund Advisors of America, a Florida-based money management firm.
On a recent trip to the sunshine state, I stopped into his office to hear why he, too, feels this is one of the best places to put your money to work today.
Q: Rick, there’s an awful lot of fear and anxiety about the economy and the stock market right now. Investors are confused and uncertain about what to do with their money. What is your take on things?
A: In a market as volatile as this, you have to spread your bets. But my take is this: If you’re looking for growth, buy dividend-paying stocks.
If you’re looking for income, buy dividend-paying stocks. If you’re looking for safety, buy dividend-paying stocks.
Q: Why?
A: The first question every investor has to ask himself is, “How should I divide my money among stocks, bonds and cash?”
The average money market fund currently pays two one-hundredths of one percent. At that rate, you will double your money in just 3,600 years.
Q: Not terribly attractive.
A: Definitely not.
And Treasury yields won’t make you jump up and click your heels, either. The 10-year guy is yielding two percent, which translates – at best – to a zero-percent yield after inflation.
Q: Tough to meet your investment goals that way.
A: Right.
In my view, dividend stocks are a good place to be right now for several reasons. Let’s talk about safety first. When the Dow traded at these levels 11 ½ years ago, it sold for 47 times earnings. Today it trades at less than 14 times earnings. Stocks are cheap right now on the basis of sales and earnings.
But even during market declines, dividend-paying stocks hold up better than non-dividend-paying stocks and sometimes fight the broad trend and rise in value. The reason is obvious. These tend to be mature, profitable companies with stable outlooks, plenty of cash and long-term staying power.
Q: U.S. companies are sitting on a record amount of cash now, too, right?
A: Correct.
U.S. companies currently hold more than $2 trillion in cash, a record. Thanks to this economy and the current Administration (don’t get me started), companies aren’t hiring and they’re not boosting spending. So a lot of this cash is rightfully going back to shareholders.
The Dow currently yields more than bonds. And dividend growth among U.S. companies has averaged 10 percent per year over the last two years, more than double the long-term dividend growth rate.
Q: Okay. Dividend stocks are less risky than non-dividend payers and currently pay more than cash or bonds. But how do you think this group will perform in the years ahead?
A: We can only use long-term historical performance as a guide, but the numbers are pretty darn encouraging. Over the last 50 years, for instance, the highest 20 percent yielding stocks in the S&P 500 returned 14.2 percent annually.
That’s good enough to double your money every five years – or quadruple it in 10. And if you were even more selective, say investing only in the 10 highest yielding stocks of the 100 largest companies in the S&P 500, your annual return would have been even better, 15.7 percent.
Q: We should add the standard caveat here about past performance and point out that there are risks with dividend stocks, too, right?
A: Indeed. You have to be selective. An investor would be foolish to plunk for a stock just because the dividend is large. The market is full of “dividend traps,” troubled companies that pay hefty dividends to keep investors from bailing out.
Q: How does an investor avoid those?
A: Mainly, by doing his or her homework. You need to look at prospective sales and earnings growth. You have to examine the balance sheet and make sure that the company isn’t too highly leveraged.
You have to note cash balances. And, perhaps most importantly, you need to analyze whether the payout ratio is sustainable.
Q: So can you give us a few examples of high-yielders that have you been buying in your managed accounts lately?
A: I’ve been nibbling at Windstream Corp. (Nasdaq: WIN), a well-run communications and networking company with an 8.3-percent current yield. I like oil and gas producer Enerplus (NYSE: ERF), with its high operating margins and 7.7-percent dividend.
And – this one is a bit different – I’ve been picking up a 10.3-percent yield with the Gabelli Global Gold Trust (AMEX: GGN). There are plenty of other attractive high-yield situations out there, too. They should be owned, of course, as part of a more broadly diversified portfolio.
Q: I agree, Rick. Thanks for your time. Let’s chat about this sector again in a few weeks.
Good investing,
Alexander Green
[Editor's Note: Fund Advisors offers Investment U subscribers a complimentary portfolio review. For more information, feel free to call Rick - or his partner Greg Galloway - at 800.438.3040 or 407.667.4729.]
2
Why Ignorance Is Bliss In the Stock Market
0 Comments | Posted by Alexander Green in Alexander Green
Why Ignorance Is Bliss In the Stock Market
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, May 2, 2011: Issue #1503
The other day I was speaking with a friend who’s too nervous to invest in the market.
“I just can’t pull the trigger,” he said. “How can you buy stocks when the Fed is priming the pump, real estate is in a tailspin, the dollar is in the tank, the Euro zone is teetering, the Middle East is a powder keg and Congress – as always – is spending money the way my wife does in Vegas?”
I know just how he feels. After all, like most investment analysts I spend my days marinating in the news cycle. I see all these terrible headlines, often several times a day. It’s hard to turn a blind eye.
But if you want to be a successful investor, you may need to do just that. Let me explain …
The national news backdrop is always unsettling. Americans experienced plenty of good times over the last 80 years, but they were punctuated by recession, depression, inflation, war (including two big ones) and almost limitless scary scenarios.
But, through it all, there’s always been plenty of money made owning the fastest-growing, most-profitable companies in the nation. Everyone knows that the best way to get rich is to own a business making money hand over fist.
Yet if you strike out on your own, you’ll find there are more than a few hurdles. For starters, you need a significant amount of capital to start a business. You have to have a lot of entrepreneurial skill, a talent for dealing with customers, employees, suppliers and regulators. And if you meet these first two requirements, strap yourself in. Because it’s a well-known fact that 85 percent of new businesses fail in the first five years.
Fortunately, you don’t have to have this kind of money or take these kinds of risks to get rich in business. You only need to own shares of companies that are – in the words of my 25-year-old nephew – “killing it.”
I’m talking about companies experiencing double-digit sales growth, sharply higher earnings and fat returns on equity. These companies tend to be innovators, continually launching hot new products and services. (Apple is a prime example.) You’ll find that institutions are taking big positions in these stocks. The companies themselves are often buying back their own shares. And the chart – which shows technical factors like price and volume – generally gets an A+.
It’s called momentum investing. And it works. Just a few weeks ago, for instance, we bought shares of internet security company Fortinet (Nasdaq: FTNT). Last week the company reported a blockbuster quarter. Sales jumped 34 percent. Operating income more than doubled. And the CEO Ken Xie pointed out that the pipeline is full and the company is achieving “significant momentum.”
Our shares jumped over 14 percent in one day. And I see plenty more upside ahead.
Of course, we never would have bought this stock if – instead of looking at the fundamentals of the business – we spent our days worrying about the state of the world.
I’ll let you in on a little secret. As an investor, it’s not your job to envision solutions for the political arena, the world economy, or the financial markets. And that’s a good thing. Because the world is way too big and complicated to figure out anyway.
And it’s not necessary. If you want to make money in the market, forget about the “macro” picture. And focus instead on identifying businesses that are likely to post huge earnings surprises in the weeks and months ahead.
That’s how all the great investors – from Buffett to Templeton to Lynch – did it. And that’s how you can do it, too.
Good investing,
Alexander Green
6
Why You Should Invest in Growth, Not Value
0 Comments | Posted by Alexander Green in Alexander Green
Why You Should Invest in Growth, Not Value
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, December 6, 2010: Issue #1401
Patrick Henry famously declared that he knew no way of judging the future but by the past.
So if you’re putting together a long-term investment portfolio, it might be wise to look at the historical returns for various types of assets. Not just for the past few years, or for several decades, but for the past couple centuries.
When you do this, you’ll notice something interesting:
- Owning a portfolio of businesses (stocks) has generally been much more rewarding than making loans to corporations or Uncle Sam (bonds) or sticking your money in the bank (cash).
- Look closer at the clear winner (equities) and you’ll also find that value stocks have outperformed growth stocks over the long haul and that small-cap value has beaten large-cap value by a substantial margin.
It therefore follows that an investor seeking maximum capital appreciation might focus on identifying undervalued small-cap stocks.
But there’s only one problem with this: It won’t work for most investors, even if the future is very much like the past. Here’s why…
Beware the Value Investing Trap
Value stocks require something that growth stocks don’t: Patience.
When a stock – either large or small – is in the cellar, it’s there for a reason. Typical ones are that the company is:
- Losing market share…
- Seeing its margins fall…
- Is losing money…
- Or is experiencing flattish sales and declining profits.
As a value investor, you don’t know when these state of affairs will end, but you might be tempted to invest in a company if it’s relatively cheap in relation to sales, earnings or book value (i.e. net worth) in the hope that management will set things right.
The problem is this can take quite a long time. Or it may never happen at all. As the stock gets cheaper and cheaper, you may believe it’s becoming an even better bargain. This is the classic “value trap.” And if you keep buying a stock on the way down, it may very well have your name on it when it hits rock bottom.
Dead Money With Decent Dividends
Even if a value stock is destined to generate a good return over, say, a three- to five-year horizon, most investors won’t be around to enjoy it.
How do I know this? Because as a former money manager, I’ve dealt with thousands of “typical investors.” And regardless of what they say in their initial interview about their willingness to stay the course and think long-term, it all goes out the window for 90% of them when the road gets bumpy. Or if things don’t kick into gear right away.
A client who sits on a stock – or even a stock fund – for six months and doesn’t see a spark will remind you with every conversation that he or she is sitting on “dead money.”
No argument there – they are (at least temporarily). But value stocks often pay decent dividends that help compensate for this. Early in my career, however, I got tired of holding hands and counseling patience and switched from a value to a growth methodology.
It was a good move. If you want action, you should have it…
There’s No Shortage of Excitement with Growth Stocks
Buy the best growth stocks you can find. Given that they tend to be twice as volatile as the market (and twice as expensive), there is generally no shortage of day-to-day excitement.
But if you use a trailing stop, you can generate results that are much better than historical long-term returns (which always assume a buy-and-hold approach) and with less risk because your positions are fully protected.
So unless you have the patience of Job – and most investors don’t – you’re better off owning growth stocks than value stocks and, of course, using a trailing stop.
In my next column, I’ll demonstrate why small-cap growth – historically the worst-performing long-term equity class – is the very best place to find blockbuster stocks.
Good investing,
Alexander Green
28
Here's a Hot "TIP" You Shouldn't Buy
0 Comments | Posted by Alexander Green in Alexander Green
Here’s a Hot “TIP” You Shouldn’t Buy
by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, October 28, 2010: Issue #1376
Six months ago, I made a strong case for buying inflation-adjusted Treasuries, better known as TIPS.
I suggested that Washington’s massive fiscal stimulus, plus record-low interest rates, might ultimately prove inflationary.
So far, they haven’t. But investors clearly feel that inflation – the thief that robs us all – is just around the corner.
Look at the traditional inflation harbinger – gold. The metal has hit one new high after another this year.
TIPS (Treasury Inflation-Protected Securities) have soared, too. In fact, they’ve rallied so far that for the first time ever, five-year TIPS were sold at auction earlier this week with a yield of minus 0.5%.
That’s right… they guarantee a negative yield. Yet investors are gobbling them up anyway.
What’s going on here? Let’s start at the beginning…
The Inside Track on TIPS
Here are some Treasury Inflation-Protected Securities (TIPS) characteristics…
- They pay interest every six months, just like a regular Treasury bond.
- Unlike traditional bonds, your principal increases each year by the amount of inflation, as measured by the consumer price index (CPI). The semi-annual interest payments also increase by the amount of inflation.
- The interest you receive is exempt from state and local income taxes (but not federal).
- TIPS are less volatile than traditional bonds.
- TIPS are excellent diversifiers.
But can TIPS possibly be worth holding, even when they sport a negative yield?
Perhaps for long-term investors (as I’ll explain in a moment). But not for short-term traders. Here’s why…
Think Twice Before Buying TIPS for the Short-Term
Current yields of less than zero on TIPS are due to rock-bottom Treasury rates and fears of higher inflation just over the horizon.
It’s simple math. Five-year Treasuries are yielding a paltry 1.2%. Given the weak dollar and Washington’s addiction to spending, traders and investors are betting that inflation will run at 1.7% or more.
That makes five-year TIPS just as attractive as five-year bonds, since 1.7% minus the 0.5% negative yield equals 1.2%.
Inflation or Disinflation?
Of course, the financial markets are a bit schizophrenic right now. Inflation protectors like gold and TIPS have rallied. But so have inflation-sensitive investments like investment grade bonds. Investors can’t seem to decide whether we’re in for inflation or disinflation.
And of course, nobody knows for sure. But TIPS have rallied by 10% over the last year, with no uptick in inflation. If the folks betting on disinflation – or its more severe cousin, outright deflation – are right, these bonds could undergo a serious price adjustment, giving investors a haircut in the process.
TIPS investors aren’t just guaranteed negative yields right now. They may also experience a negative total return for several years in a row.
So why shouldn’t long-term investors sell them outright?
How to Tackle TIPS if You’re a Long-Term or Short-Term Investor
Some would be prudent to do just that. The only catch is this: What if the inflation hawks are right?
If they are, TIPS will give a higher future return than traditional fixed-income investments – and with the highest degree of safety. (They are, after all, obligations of the U.S. government.)
True, there are other inflation alternatives. But gold has already quintupled over the last decade. And that other famous inflation hedge – your home – is likely to remain mired in quicksand for years to come, thanks to the overhang of foreclosures and other unsold properties.
The bottom line is this:
- Long-term investors – those with a time horizon of five years or more – should hold onto their TIPS.
- But traders and other investors with a shorter time horizon should probably give them a miss.
History shows that once an asset class turns hot – whether it’s stocks, bonds, gold, real estate or TIPS – it rarely delivers the kind of returns it did when it was heating up.
This time could be different, of course. But that’s how investors always rationalize their investments at the top.
The oldest advice is still the best: Caveat emptor.
Alexander Green
8
How to Insure Your Financial Freedom
0 Comments | Posted by Alexander Green in Alexander Green
How to Insure Your Financial Freedom
by Alexander Green, Chief Investment Strategist
Friday, October 8, 2010: Issue #1362
If there’s one word that encapsulates the world’s current investment environment, it’s this: uncertainty. For example…
- A raft of economists and market analysts look at the sharp climb in Treasury bonds and claim that we’re in for a period of deflation, perhaps like Japan experienced in the 1990s… or worse.
- Other economists point to the historic rally in gold that has pushed the price through the $1,300 per ounce mark and forecast higher inflation.
- Over the first half of the year, the Eurozone looked like it was coming apart at the seams and the euro got slammed. But in the third quarter, the currency staged an impressive rally, climbing 11.5% against the U.S. dollar.
- Will the dollar rise or fall from here? It’s hard to say. We’re in the midst of an international currency war. Governments and central banks around the globe are trying to force down their currencies in a beggar-thy-neighbor attempt to gain a competitive advantage over their trading partners.
Nobel Prize-winning economist Robert Mundell recently noted on Bloomberg TV that this “is a terrible thing for the world economy” and that, “We’ve never been in this unstable position in the entire currency history of 3,000 years.”
So what are investors doing to combat it?
The Ultimate 2-for-1 Investment: Upside Growth and Downside Protection
Is it any wonder that so many investors are hiding in cash, earning an average .05% return on their money? (Note that an investment compounding at this rate takes 1,440 years to double.)
But wouldn’t it be great if you could own an investment that allows you to participate in global growth if the world economy recovers and protects 100% of your portfolio if it doesn’t?
Such an investment already exists. In fact, Erika Nolan and Shannon Crouch just wrote a book about it. It’s called The Insured Portfolio: Your Gateway to Stress-Free Global Investments.
Protect Your Wealth and Assets from the Ravages of the Market
I’ve known Erika and Shannon – and respected their global expertise – for years. You may have met them yourself at one of our many conferences. They head up The Sovereign Society, an offshore asset protection and international finance organization. Their specialty is showing investors how to preserve wealth, protect assets from frivolous lawsuits, diversify outside the U.S. dollar and enjoy tax-privileged growth.
As a former Wall Street executive myself, I can assure you that the average broker, insurance agent or money manager knows nothing about this area. Erika and Shannon have decades of experience in the field and have teamed up with Marc-Andre Sola, a Swiss attorney, to provide the best and latest information on offshore asset protection and estate planning.
If you’re young, just starting out in the investment game and have yet to accumulate much, you can safely give this information a miss. But if you’ve accumulated a substantial nest egg and are concerned about potential losses from volatile markets, high inflation, a weak dollar or potential litigants, The Insured Portfolio offers battle-tested strategies you cannot afford to ignore.
You’ve Worked Hard for Your Money… And Here’s the Best Way to Make Sure You Keep It
Look at it this way: If you’re a high-net-worth individual, you’ve probably succeeded against intense competition in your field. (That’s not easy.) You’ve paid a high percentage of your income in taxes. And you’ve saved a substantial amount of your after-tax income instead of spending it.
Are you willing to let violent markets, misguided and self-interested politicians or rapacious lawyers take the fruits of years of hard work, persistence and prudent living?
If your answer – as I suspect – is a resounding “no,” check out The Insured Portfolio. It’s available at bookstores nationwide. Or you can pick it up today for less than $20 on Amazon.
Good investing,
Alexander Green
26
Timing the Market: If Only You Knew What Mark Hulbert Knows…
0 Comments | Posted by Alexander Green in Alexander Green
Timing the Market: If Only You Knew What Mark Hulbert Knows…
by Alexander Green, Chief Investment Strategist
Monday, April 26, 2010: Issue #1246
For over a decade, I’ve been telling readers that timing the market isn’t just unhelpful… it actually hurts performance.
Now the evidence is even more definitive…
Sure, it’s easy to look back and see exactly when you could have been in or out of the market for maximum performance. That’s the beauty of hindsight.
But when you look ahead, things get a whole lot cloudier. So if you’re even thinking about jumping in or out based on some guru’s system or “market outlook,” listen up…
Trying to Time the Market? Don’t Do It!
The Journal of Financial Economics, an academic journal, recently published a new study – “Measuring Investor Sentiment With Mutual Fund Flows.”
Using easily available public information published by the Investment Company Institute, a mutual fund trade organization, the researchers focused on investor exchanges out of stock funds into bond funds and vice-versa.
This led to an interesting discovery…
- The research shows that market timers, as a group, have god-awful instincts. In fact, you could hardly find a better investment system than to do EXACTLY THE OPPOSITE of what they’re doing.
- The researchers built a hypothetical portfolio going all the way back to 1984 and switched back-and-forth between the S&P 500 and 90-day T-bills. They did the mirror opposite of what mutual fund flow figures showed switchers were doing.
- Over the next 25 years, the portfolio produced an annual return of 12% – 1.6% a year better than merely buying and holding the S&P 500.
To put this in concrete terms, buy-and-holders turned a $10,000 initial investment (with dividends reinvested) into $118,639 over the period.
Those who did the opposite of mutual fund timers, however, turned the same $10,000 into more than $170,000. (Most fund switchers, on the other hand, did about as well as someone betting on black or red at the roulette wheel.)
That’s not the best part, however…
An Impressive Performance… For Serious Contrarians Only
What makes these numbers even more impressive is that the contrarian portfolio took on far less risk than being fully invested in stocks. After all, it was invested in riskless T-bills nearly half the time.
I’m not actually recommending that you follow this strategy, incidentally. For one thing, past performance – as every investment prospectus reminds you – does not guarantee future results.
Plus, 25 years as a portfolio manager and investment writer have proved to me that the overwhelming majority of investors lack the emotional discipline to invest contrary to the crowd. (So when the chips are down, you may still be out.)
As Mark Hulbert, editor of the independent Hulbert Financial Digest, concludes, the average investor “would be far better off if he never engaged in market timing.”
The Oxford Club doesn’t. And it shows in our results…
A Top Five Ranking for 10 Years Running
Of course, every newsletter editor brags that his investment letter gives superior returns. The industry bears an uncanny resemblance to Lake Wobegone, where “all the women are strong, all the men are good-looking and all the children are above average.”
It’s worth noting, however, that Hulbert ranks The Oxford Club Communiqué among the top five letters in the nation for risk-adjusted performance over the past 10 years.
That allows us to give entirely honest answers to the two most commonly asked questions:
- “How has your investment advice worked out?” – Beautifully.
- “What do you think the market will do next?” – We haven’t the foggiest notion.
Good investing,
Alexander Green
Editor’s Note: Are you trying to time the stock market? Don’t! There’s a better way to tackle the investing process: let some of the best, most successful analysts in the business do the work for you.
The Oxford Club’s pragmatic, “market neutral” approach has generated consistent, impressive results for many years, based on real facts, information and numbers that matter, not arbitrary stock market indicators or timing.
For more details on how you can profit from the stocks in The Oxford Club’s Communiqué portfolio, please visit this link. You’ll see why the Hulbert Financial Digest has ranked the Communiqué in the top five investment newsletters over the past 10 years and get the latest investing ideas, insights and recommendations that can make you money for the next year and beyond.
