ASS-KICK: Stocks PUNISHED Hard!
The 1940s and 1970s were categorized by low growth, high inflation, and uncertain economic conditions. Within these time frames, price appreciation (the difference between the price paid and the higher price today) made-up an insignificant portion of stock market returns, and in the coming decade, Wealth Research Group sees this phenomenon occurring again.
Today, I want to show you how to consistently outperform the S&P 500 during a time, when millions of worried investors will attempt all sorts of strategies to merely stay ahead of inflation, while your results will be disproportionally superior, even while taking the lesser risk.
Stock investors will face several problems in the years ahead, but, in no doubt, the most obvious one is that central banks are exiting their massive accommodative positions (Bond and stock purchases).
In other words, the source of artificial liquidity and buyer-side protection, which has helped us earn juicy returns on stocks for over a decade, is going away.
This doesn’t necessarily mean that there will be a credit crunch or that a “reset event” is inevitable, but it does mean that the market will be made up of only the “normalized” players, individuals, institutions, and government funds.
This means that prices will be pressured to the downside, which is why the element of capital gains will shrink, compared with its performance during the current bull market.
Most investors buy a stock with a sole intent in mind – to sell it later for a higher price. This can be achieved in one of three ways:
- Strong Market Trends: In many cases, it is not brilliance or savvy stock-picking that delivers us great results.
The broad market is rising, and your positions are simply part of this phenomenon.
This is, of course, risky, since you’re relying on new buyers to bid up prices for you to realize gains. 2017 is an excellent example of this, as the market never went down, so buying the S&P 500 index, which is comprised of 500 individual stocks, delivered a 23% return, which is unbelievable.
As you can see, though, 2018 is correcting this wrong and, thus far, the index has delivered 0% returns in its first five months.
Over the long-term, following market trends has proven itself only over the short-term (a number of months) and with much smaller positions, due to the risks involved.
- Mean Reversion: One of my favorite strategies is to look at extreme situations, which rarely happen, where stocks have suffered brutal sell-offs, curved a bottom, and are ready to revert to historical averages.
I love this strategy, since it doesn’t genuinely require that the company post stellar earnings or make significant progress for the price to rise. All that needs to occur is that the company stays afloat and keeps churning along.
This was Warren Buffett’s early day’s strategy and even a big part of Benjamin Graham’s (father of modern-day value investing) philosophy.
Buffett calls it “cigarette-butt investing,” since what he looked for were cheap stocks, which can give one big rally and then he takes profits, not worrying about what happens next. Like a free cigarette found on the pavement, which has one last puff in it; you can smoke for free and throw away, so these stocks offer one free puff (a high-probability rally).
The challenge with this is that these situations are not frequent. Finding stocks, which trade for less than the cash in the bank, for example, is a difficult task.
- Intrinsic Value Discounting: This has been the bread and butter of my investment portfolio for 18 years.
It works, since we’re buying shares in companies, which are discounted to their intrinsic valuations, even grossly so, and do not need to wait for the company to change a failing management and perform a miracle turnaround, but only to resume growing at historical levels.
Panicky investors sell their shares in companies, sometimes for big discounts, due to unjustified fears.
With all that said, price appreciation is NOT how you’ll make money in the years ahead. Again, I expect multiples to shrink and for shares prices to come down to earth, in general.
Take a look:
As you can see from the chart above, the key to beating inflation, making positive returns, and strengthening your portfolio in the coming decade, is focusing on dividends.
I want you to, particularly, look at the decade of the 1940s and the 1970s, where dividends played an overwhelming role in the returns made by investors.
While stocks advanced modestly, it was the dividends, which made up nearly 75% of the returns.
Within the universe of dividend-paying stocks, there is a specific group, which I’m loading-up on personally. These are dividend-raisers.
Check this out:
The difference in the returns made is enormous and grows more substantial, as the years go by.
Right now, there are only a few stocks, which are at bargain territory, but soon there will be more opportunities.
I want to stress that while I do anticipate seeing a 20%-30% drop with the large indices, it can come about after a big rally, so waiting on the sidelines, hoarding a massive cash position, could be a good idea, but if you see a classic value proposition, waiting is a mistake.
Dividends matter big-time. This is especially true in sustained sideways markets or mild bear markets.
When looking at long-term positions, the more you’re holding onto a stock, the more dividends will be the determining factor in performance, which is why we want to primarily invest in those rare companies that can keep increasing dividends.
Stocks will punish investors, for a long time, perhaps an entire decade, with modest capital gains, while inflation makes fixed-income assets, toxic. Dividends will make the difference between low total returns and juicy ones.