An unprecedented value opportunity may be just ahead.
Before we see why, let me please exclaim loudly…proceed with care.
We may be seeing a systemic cleansing similar to the 20s. Even if we are not, this is a time when investors can do everything, that in the past, was right and still lose.
However many indicators suggest that this is a time when most investors believe the market will be down, but it actually will rise…perhaps a lot.
Invest now? Does this sound crazy? probably no crazier than in August 2007 when everything looked so fantastic and I warned readers to reduce debt and I unloaded most of my equities, moving into cash, Ecuador real estate and bonds instead.
As you can imagine I am pretty happy about this right now. We’ll review my exact portfolio later but for now let’s see where our portfolio was a year ago and where it is right now. The
2008 figures are rounded.
October 2007 Total Cash 9.7%
October 2008 Cash 10%
October 2008 Foreclosure Cash 3%
October 2008 Total Cash 13%
October 2007 Equities 6%
October 2007 Emerging Equities 1.5%
October 2008 Equities 5%
October 2008 Emerging Equities 1%
October 2008 Total Equities 6%
October 2007 Bonds 31.7%
October 2007 Emerging Bonds 8.5%
October 2008 Bonds 24%
October 2008 Emerging Bonds 10%
October 2008 Total Bonds 34%
October 2007 US Farmland 21%
October 2008 US Farmland 31%
October 2007 US Commercial Property 19%
October 2008 US Commercial Property 6%
October 2007 Ecuador Property 3%
October 2008 Ecuador Property 10%
First, let me clarify that this portfolio is not totally accurate. All the property is shown at cost. Much of this was purchased as long as a decade ago and could be sold for much more than shown. Both US and Ecuador property.
Second, even without trying to estimate a real estate value the portfolio rose…just a bit…about 5%. That is less then half the performance in 2007, but for this last year I am pleased. Not losing in 2008 is good! In addition to maintaining the portfolio’s capital, I feel especially well positioned to capitalize on current events. My cash position has grown and and many of the existing bonds mature this next year. This gives me plenty of liquidity to pick up bargains created now.
Third, I did little buying or selling of equities this year. The reduction of equities in the portfolio is entirely due to drops in price of the equities held.
I mostly looked for bargains in real estate…mainly in Ecuador and picked up several.
The same is true for bonds. The reduction in bonds in the portfolio is due to
maturities and the increase in emerging markets is due to currency strengthening of the bonds held.
Last year I felt a bit like a spider sitting in its web watching the fly come closer.
Now I am ready to bite! I have committed 3% of my portfolio to buying US real estate foreclosures.
Plus I am watching equities. The time to buy may be near.
Let me explain why.
For the past 100 years or so, the US stock market has moved in approximate 15 year up and down cycles. The market has risen even in down cycle but not as much as during the up.
There has always been a lot of sideways motion in the down cycles as well. This is the movement that chops non thinking investor to pieces.
The current 15 year down cycle began 10.5 years ago in early 1998 after the historically high 1982 to 1998 15 year run up.
The previous 15 year down cycle ran from February 1966 to August 1982. I regularly compare the sub cycles of that down period with the current 1998 to 2013 down cycle to see how they match up.
The last 15 year down cycle began in February 1966 when the stock market dropped 22% in eight months.
The current 1998 to 2013, 15 year down cycle, began when the market dropped 17% in nine months in 1998.
This first drop appears to be a warning shot and has always followed by a recovery that pulls the remaining suckers in…those who are still excited from the 15 year run up that has ended though the unwary investor has not realized this fact.
The first recovery in the 1966 – 1982 cycle ran from late 1966 to 1968. The market rose +48% in 26 months. This is when I first became involved in investing…at age 22. I knew everything. I had all the facts (supported by the last 15 years). So I lost everything (and a bit more) from 1968 to 1970 when the market dropped 36% in 18 months.
The first 1998-2013 recovery came from 1998 to 2000 when the market rose 60% in 18 months. This was a faster, higher recovery (than in 1966 to 1968) and it was followed by a slower, more shallow slide in the second 1998-2013 down sub cycle. From 2000-2003 it took the market 36 months to drop 25%. (compared to the 36% in 18 months in the previous down cycle).
Finally in these down cycles a second (call it mid term) correction takes hold. Good values, created by the downturn, attract investors.
That rise in 1970 lasted through 1973 as the market rose 74% in 32 months.
We experienced a similar rise in 2003 to 2004 when the market rose 30% in 12 months.
Yet this is a bear cycle so these gains are soon taken back in the third down sub cycle.
From 1973 to 1974 the market dropped 48% in 21 months.
During 2004 through 2005 this down cycle was shorter, down 10% in 12 months.
These cycles then suggest another nice rise before one final, killer plunge.
1974 through 1976 saw the market bolt up 73% in 24 months.
This matches the 2005-2007 rise of a market jump up 45% in 32 months.
This comparison brought us to late 2007.
So the first ten years or so of these down cycles, the results have eerily the same.
In 1966-1976 the market rose 94% in 129 months.
1998-2007 saw a rise of 83% in 119 months.
If this comparison had been spot on there should have been a bit more rise over the last ten months…till about August 2008.
There was not. The market has dropped…a lot…as did markets world wide.
In the rest of the 1966 to 1982 down cycle we saw three more waves.
From 1976-1978 the market dropped 19% in 18 months.
From October 2007 to October 2008 the market (Dow Index) dropped about 21%.
Then from 1978 to 1980 the market rocketed back 62% in 32 months before that last crunch down in 1980 to 1982 when the market fell 27% in 27 months.
If, and there are TWO BIG IFs, history repeats, we should see a dramatic market come back shortly. IF this 21% correction we have seen this last year has been the down wave and IF the market sentiment is bolstered by the current bailout, we could see a huge correction…for two reasons.
First, unthinking investors lose their fear and become greedy again.
Second, thinking investors realize that the current bailout is likely to ratchet inflation to new levels so they’ll jump from bonds and cash into equities.
These historical comparisons are so inexact that we cannot predict what will happen in the short term. Yet this historical review shows that there is a great reason to be looking at rather than running from equities.
History strongly suggests that we will see at least one more strong equity market surge in the 1998 to 2013 bear cycle. Then some great new innovation will ignite the next 15 year bull. This will be very good news for retiring boomers who manage not to be wiped out in the down portions of the current sideways motion.
This historical review and our understanding, that in the long term, equities overall are always the best investment, suggests that if this current down wave creates some good equity values, we should be buying.
Even more so, we should be looking for value in Europe. As we saw in Keppler’s latest value analysis, European markets offer the best value overall. The bailout may create further US dollar decline as well.
There is much more to learn from this study and we’ll continue next lesson.
Until then, good global investing.
I’ll review my entire portfolio and all this thinking next weekend. October 3-5 in North Carolina at our International Investing and Business Course.
The course was fully booked but we had so many late applications that we have moved to a larger meeting room and therefore still have space.
Join me with Thomas Fischer of Global Asset Management, who was a currency trader for years to review our multi currency portfolio thinking for the year ahead.
To help our Multi Currency subscribers meet him and learn direct how Jyske can help, we are are dropping the price of your subscription ($249) from the course fee. The normal course fee is $749 for one or $999 for two. The fee for all Multi Currency Portfolio Course subscribers is reduced to $500 for one or $750 for two
Please send me any other questions. I’ll give the questions priority if you add BL in the subject line. I cannot give you direct investment advice individually but can answer questions (without disclosing your identity) in these lessons.
Better still ask you questions in person! Join me with Thomas Fischer Friday to Sunday, October 3-5.
This will not be all work-no play. We selected this weekend as the most likely to be beautiful with the autumnal leaf change. The colors are glorious.
Here delegates at a previous course chat during a coffee break.
Save $249 (the fee you paid for this online course) off the normal enrollment.
Enroll for one…only $500. Join us. Save $249 for one here
Enroll for two…only $750. Enjoy a couples discount. Save $749 for two here
We’ll be looking at the investment potential in Ecuador and if you are considering a visit learn how to gain a Galapagos savings now