These are unusual times, filled with opportunity for a few. There is just anxiety for most. The main focus in Merri’s and my life is to help make these times prosperous for you. Your questions help us do this.
When I see a common theme, I can understand your worries and thoughts.
For example, right now there seems to be great concern about the US dollar and the entire economic system.
Many notes are coming from you, like this:
Hi Gary: I am Canadian living in Vancouver, B.C. I’m thinking of buying gold because I hear it will rise as the American dollar decreases. Our dollar is about 80 cents compared to the American dollar so I thought I would wait till our dollar pulls more even with the U.S. dollar so I would get a better investment. I presently hold about 25,000 in new brunswick bonds(Canadian Bonds) 25,000 in George Weston bonds and have invested 75,000 in a wellness centre. Right now I am going to have to sell some bonds as my expenses well exceed my income as I am presently retired. I would like to buy real estate but it is very expensive here even though it has dropped 20% in the past year. Do you think it is wise to buy gold now and/or Canadian real estate? Thanks.
Another reader asks:
Dear Mr Scott, Your daily commentary on Ecuador and related topics and courses make enjoyable reading for me. I hope to come down and walk those
beautiful Ecuador beaches and see the awesome sunsets. Thank you for your
efforts. I would like to differ with you on this morning’s commentary on
currency and alternatives to the USD. I don’t want to burden you with my background and research efforts, but suffice to say the current monetary picture will soon have a systemic collapse and a new monetary world will emerge thereafter. This neo-world will look to a basket that will be proportionally weighted and most certainly have a gold element included to instill confidence. Presently, 70% of the world’s Central Bank’s have as their reserves the US dollar. Obviously, the sun is setting fast on that situation. 2009 will see the first outline of a new global monetary issue and the Big 20 meeting in London inside of 30 days will give the world a hint of final decisions to come. Uncle Sam will be at the table, of course, but this table will be round, not a rectangle. Those days are long gone. Best regards,
Another reader feels the multi currency problem is about to come to a head with Obama and shared:
Dear Mr. Scott, I have read your newsletter for many months and want to thank you for the interesting and valuable information that you provide. I recently heard from several trusted sources that the US dollar will collapse 1-2 months after our new President is signed in. This is alarming and I’d like to find a way to protect my limited wealth. You mentioned a bank in Denmark that you favor. Would you be kind enough to send me the contact information so that I can establish an account. Might you suggest a financial instrument to transfer my
money into? My friends are all buying gold coins, but to me that does
not seem liquid enough when your trying to buy food… I will do one of your courses in the future, I think the publishing one, but in the meantime any advise would be gratefully accepted. Best Wishes,
Yet another feels the opposite and asks:
Why not just keep your money in gold/silver? All fiat currency will crash sooner or later.
My reply covers all these questions.
Re gold. I’ll have a friend who is one if the world’s gold experts do a feature lesson on the state of gold shortly. I have often thought of just buying gold myself and forgetting all this work of keeping up. If for no other reason this has such simplicity. However, though history shows that gold always adjusts for inflation eventually… history also shows that gold can have huge price swings that may last for decades.
I know one client who cashed out his portfolio and just bought gold about 30 years ago when the price was $860 an ounce. So we have to ask, when is sooner or later?
I know another client who bought a lot of gold and then had it confiscated when he tried to cross a border with it. His crime… just having a lot of gold as far as we can tell.
Plus if you live outside of a major city how often do you have to run to a metropolis to sell some gold? How about the security risks?
I have a little more faith in the resiliency of mankind every day. Sometimes when we have more turmoil than expected, it is hard to see how things can get better. Yet in every decade, the 60s, 70s, 80s and 90s, there has been a crash and after the crash, a recovery.
I am not a gold bug or real estate or share bug. I am a VALUE BUG. I like value and find it exceedingly hard to know gold’s real value.
I also like diversification and have created a hedge for each potential situation…for things to get better or worse. So I have some gold. have some equities…but not all that much.
It will be interesting to see how everything unfolds. For now I’ll not buy too many Amero futures or blocks of gold. Nothing to date suggests to me that this downturn is any different than any others.
I do keep some gold socked away. I do live on a farm where I can feed myself in case of an extreme global currency dislocation. The farm however is a lifestyle situation and makes no comment on my belief on global affairs.
I have not abandoned my core belief that there are four ways to fight inflation and currency turmoil. My portfolio is based on these beliefs.
History suggests that we can always succeed in:
#1: Our own business.
#2: Real estate
#4: Equities (ownership of other people’s business)
No investment can succeed like our own. This is why we have created our newest course on how to have a web based business. There is a special offer on this new course that expired to the general public last Tuesday…but is still available to you as a multi currency subscriber. See the offer here.
After investing in yourself, history suggests that the next best overall investment in other people’s business is in equities.
The best way to buy shares is to invest in good value shares. This is why one of the major themes in this course are based around the value recommendations of Michael Keppler.
Michael just sent a study on why not to abandon shares now. Here is what he wrote:
“We have not seen anything like this since the end of the 40s: dividend yields of 5 percent and more, while 10-year US government bonds offer yields of only 2.5 percent!
Will investors be emotionally able to take advantage of the stock market crash of 2008, or will recent losses make them succumb to a bear market psychology? Are there lessons to be learned from historical parallels to today’s markets?
Only very few Germans benefited from the attractive stock prices during the years immediately following the introduction of the Deutschmark in 1948. Stocks, unlike consumer goods, were not in demand then, particularly as German stocks were for the most part in the hands of a few wealthy industrialist families, banks and insurance companies that had little incentive to make stocks accessible to the wider public.
Why should they? Banks preferred to pay investors meager interests on their deposits and provided this low-cost capital to businesses in the form of corporate loans. Or better yet, they used it to acquire stocks of German blue chip companies.
The situation was similar in the United States: Stock investors were threatened with extinction in the late 40s. How else can one explain that the Standard & Poor’s 500 Index in mid-1949 was priced below book value and at only 5.8 times earnings and that the dividend yield of the stocks contained in the S&P 500 Index, at 7.3 percent, was almost three times higher than the 2.5 per- cent yield of long-term US government bonds?
Investigating the causes: Aversion to stocks resulting from market crash, economic depression and war.
If one wants to explore the reasons why stocks were out of favor in the late 40s, one has to go back further and ask, “Who were the potential stock investors then and what was the basis of their decision to invest their savings elsewhere?” The 30- to 65-year-olds, at that time, were still scarred by the stock market crash of 1929 to 1932, when the S&P 500 lost 85 percent of its value. In the ensuing depression, a quarter of all Americans lost their jobs. Then came World
War II. When Americans began slowly to recover, starting in 1946, their primary concern was safety.
The bitter experiences of the recent past led them to abandon the equity market.
Investors ignored the advantages of stock ownership. Nobody wanted to touch stocks.
Yet, investors who put their money in seemingly safe US government paper at that time would soon come to regret this decision. In the 50s, they watched the stock market go up by 19 per- cent per year on average. As inflation rates started to rise in the 60s, the prices of US government bonds dropped and continued to do so until 1981.
Owners of short-term US T-Bills fared not much better. Only in the 50s was a new generation investors able to judge the attractiveness of stocks more objectively than those who had experienced first hand the 1929 stock market crash and the depression of the 30s.
Benjamin Graham (1894-1976) was no longer part of this new generation of stock investors.
However, his disciples (then assistants) Thomas Knapp, William J. Ruane, Walter Schloss and, of course, Warren Buffett were. They became the great proponents of stocks in the 50s and 60s.
Graham retired in 1955 at age 59, frustrated by stock prices that were excessively high according to his standards of valuation. Experience shows that stock market valuations are linked to socio-economic factors and may remain at high, medium or low levels for many years.
Historical parallels: Does stock market history repeat itself?
The stock market environment in the US at the end of 2008 is not unlike 1949.
Given the fact that the 10-year returns of major stock indexes have now slipped into negative territory, the long-term benefits of investing in stocks are increasingly called into question. In general, investors rarely act on the basis of a rational evaluation of the situation at hand.
German investors, in particular, tend to allocate large portions of their assets to ostensibly safe money market instruments, while getting caught up from time to time in rampant stock market speculation.
In 1999, an investment in DAX blue chips such as Bayer or RWE was far too conservative, while a stock like Deutsche Telekom (priced at 50 or more times earnings) looked much more enticing—not to mention the newly listed Internet stocks that were all the rage.
After Deutsche Telecom plummeted when the dot.com bubble burst and the formerly highly rated technology, media and Internet stocks disappeared from the stock listings altogether, investors focused their attention on “Zertifikate” products that bet on expected market moves. After all, you only need to know where the DAX will be at the end of the year. Nobody seemed to be bothered by the fact that this is anyone’s guess, notwithstanding the forecasts by legions of pundits who attempt to predict the unpredictable. One can only hope that investors who suffered as a result of these decisions will not make the same mistakes today that Americans made in the late 40s.
Stocks offer long-term potential.
Let me try to describe the outlook for stocks over the next ten years, based on past experience.
In the US, stocks delivered an average annual total return of some 9.6 percent over the past 83 years, while government bonds yielded 5.2 percent and T-Bills returned 3.7 percent over the same period. In most countries with market economies and legal systems protecting property rights, the return relationships are similar. This has been confirmed by empirical studies for the United Kingdom, France, Germany, Switzerland, and many other countries.
Stocks have delivered higher returns than bonds and T-bills over most, if not all, 10-year periods (since 1930).
The table below shows average 10-year returns and book value growth of US stocks since the end of the 20s:
10-Year Periods Total Return Book Value Growth p.a. % p.a. %
December 1929 to December 1939 + 0.1 + 7.2
December 1939 to December 1949 + 8.9 +10.1
December 1949 to December 1959 +19.3 +13.2
December 1959 to December 1969 + 7.8 + 8.2
December 1969 to December 1979 + 3.3 +10.1
December 1979 to December 1989 +15.6 + 9.1
December 1989 to December 1999 +18.1 + 7.0
December 1999 to Dec 2008 (9 years) – 1.7 + 9.2
Average Dec 1929 to Dec 2008 + 8.8 + 9.3
Note: Standard & Poor’s 500 Index from 1930 to 1969; MSCI USA Index from 1970 to December 2008
Book value growth is the most important component of long-term stock market returns. It comprises not only the annual earnings growth but also the change in value of a company’s net assets. If the valuation of a stock does not change, book value growth and stock price performance are identical. However, as a rule, stock prices fluctuate much more strongly than the underlying book values due to changes in valuation.
The irrational investor comes into play here, driving prices up during times of euphoria or, as is currently the case, driving prices down during times of pessimism.
As a result, the first decade of the new millennium threatens to provide a negative return — during the first nine years, the return was – 1.7 percent per year!
This would make it the first decade with negative nominal total returns after the quasi zero return for US stocks in the 30s.
Low valuations and a lack of investment alternatives
Interestingly, these negative returns have yet to reflect poor fundamentals: Over the past nine years, the companies included in the MSCI USA Index had an average annual earnings growth of 4.4 percent, cash flow growth of 6.7 percent, and dividend growth of 6.6 percent.
The decline in stock prices since the end of 1999 is due to valuations falling 50 percent over the same period. Therefore, the problem of low total returns is rooted in the past:
In December 1999, investors were willing to pay 31 times earnings and 5.8 times book value for US stocks included in the MSCI USA Index.
Today’s price/earnings ratio is 13.5 and the price to book value ratio is
1.7. These are not yet bargain valuations in absolute terms. What makes stocks attractive today is the lack of investment alternatives.
In other words, it is mainly opportunity costs, in particular the low yields of fixed-income securities, that make stocks interesting investments today.
The current price/earnings ratio of the MSCI USA Index of 13.5 implies an earnings yield of 7.4 percent (100/13.5). Even if one assumes the depression scenario of the 30s, i.e. flat stock prices over 10 years, and assumes that corporate earnings will shrink 1.5 percent per year on average for the next 10 years, the earnings yield of the MSCI USA Index would still be 6.5 percent at the end of 2018 — 2.6 times higher than today’s 10-year US government bond yields. Such a drastic earnings decline would correspond to the average drop in earnings of the companies contained in the S&P 500 Index during the decade of the depression ending in 1939 — a scenario that is overly pessimistic in my view.
Favorable outlook for US stocks
A more realistic assumption would be for book value to grow in the order of 6 to 8 percent over the next 10 years. Based on this expectation, the Dow Jones Industrials Index stands a good chance of exceeding, over the next 10 years, its previous high of 14,164.53 reached on October 9, 2007.
From the year-end 2008 level of 8,776.39, this would require an average annual price return of only 4.9 percent (which is below the historical average), with a dividend yield of currently 3 percent per annum thrown into the bargain.
The risk of losing money with US stocks over the next 10 years is therefore minimal from today’s perspective, while it is a certainty that investors will not earn more than 2.5 percent per annum with US government bonds over the next 10 years.
This fact should be borne in mind when making investment
The outlook appears similar for other equity markets around the world, some of which, according to our valuation analysis, offer even more attractive long-term investment opportunities than US stocks. January 2009
Note: A previous version of this commentary (in German) appeared in the e-fund journal on December 19, 2008.
Michael notes that these views reflect those of Keppler Asset Management Inc. as of the date of this document. These views are subject to change at any time based on market or other conditions, and Keppler Asset Management Inc. disclaims any responsibility to update such views. These views may not be relied upon as investment advice, and, because investment advice for clients of Keppler Asset Management Inc. is based on numerous factors, may not be relied upon as an indication of recommendations issued by the firm. The information provided in this commentary should not be considered recommendations by Keppler Asset Management Inc. to purchase or sell securities. Predictions are inherently limited and should not be relied upon as an indication of actual or future performance.
Michael’s comments support my belief that equities are the best way to invest long term and offer great value and safe long term opportunity at this time.
These lessons have noted many times that I personally prefer real estate to shares. This is because I enjoy looking at real estate and hate studying balances sheets. To me real estate is fund. shares are no. This is a personal decision based on my unique position. That does not mean that real estate is a better investment than shares.
Diversification and value, rather then speculation are the keys to share investing and every investor should work with their investment adviser to select a portfolio that suits their own unique needs.
Until next lesson, good investing to you.
Your own business is a good way to secure purchasing power. This is why Merri, our webmaster and I decided to create a new course on how to build a web business with a webmaster. There is a special offer on this new course that expired to the general public last Tuesday…but is still available to you.
See the offer here.
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