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Stocks Are Nearly the Cheapest They've Ever Been in My LifetimeBy
Saturday, October 22, 2011
"Half the battle is buying things at the right price, and right now stocks are priced right..."
"It's the cheapest in the past 25 years..."
It was strange to hear these words at the Value Investing Congress in New York City. And hearing it from two of the smartest value investors I know was shocking.
Value investors like to focus on individual stocks. They usually don't care about the "big picture." But Joel Greenblatt and Leon Cooperman – two of the greats – were saying stocks as an asset class are nearly as cheap as they've ever been.
I agree. And it's got big implications for your portfolio. Let me show you what I'm talking about...
Stocks relative to other asset classes – specifically bonds – are as cheap as they've been in 50 years. As an investor, you have to look at this chart and take pause...
.png) For most of my investing career (which began on the left side of the chart), the U.S. 10-year Treasury paid a lot more in interest than stocks paid in dividends.
For example, in the 1980s, stocks paid 6%. The 10-year Treasury was paying 14%. Smart investors owned some of each to balance out their portfolios. Owning stocks gave you the potential for long-term gains and some income... Bonds gave you tons of income with little hope for capital gains if held to maturity.
Today, things have changed.
The 10-year Treasury is paying less than 2%. But inflation is around 3%. Holding bonds is risky. The yield on them might not even cover the loss from inflation.
Stocks, on the other hand, are offering an unusual opportunity. The S&P 500 dividend yield – at 2.3% – is now higher than the 10-year Treasury yield. This is a big change from the past decades.
The last time this happened regularly was before 1958. But at the time, regulations were lacking. Reporting requirements were weaker. And investors couldn't get the same amount of information that they can today. Stocks had to pay something more to make up for the extreme risk.
More recently, the 10-year Treasury yield dipped below the S&P yield in 2008-2009. That was one of the best times to buy stocks in a generation.
For years, intelligent investors have held stocks and risk-free safe government bonds. One hedged the other in good and bad times. The combined returns were a mix of income and capital gains.
But with stocks so cheap compared to bonds, it makes sense to reconsider this. As you allocate your investments, you might join me in adding a few more stocks...
In my Retirement Millionaire service, we're buying the same sorts of stocks value greats Greenblatt and Cooperman talked up at the conference: technology and health care companies with strong cash flows and solid balance sheets.
These businesses will perform in good times and bad. And with stocks so cheap right now, it's a great time to buy.
Here's to your health wealth and a great retirement,
Doc Eifrig
Further Reading:
Find more common-sense investing tips from Doc Eifrig here…
"If you take your money away from Wall Street and keep it local, you'll support small business ventures near you. I don't know about you, but I don't want to pay for any more golf trips, big bonuses, or million-dollar office decorations."
"If you can ignore the "doom and gloom" hype, you can buy some of the world's best businesses at incredible prices."
"Trading is all about patience... developing the patience to hold cash and savings and sit tight until the ideal opportunity presents itself... an opportunity where the odds are overwhelmingly stacked in your favor."
Market NotesCHART OF THE WEEK: THE REASON YOU'RE PROBABLY NOT DIVERSIFIED AT ALL Stocks plummeted in August. They traded sideways in September. They've rallied in October.
And so has everything else. That's the idea behind our chart of the week.
Many people take a position in commodities like crude oil, copper, and corn with the idea that they're diversifying their portfolio. And oftentimes, that's a reasonable idea. But not now. Almost every conventional asset you can think of has become bundled together in a huge "risk on, risk off" trade. Stocks, commodities, and even real estate stocks are moving in the same up-and-down fashion, at the same rate.
For a picture of this "correlation," note the chart below. It plots the performance of stocks (blue line), commodities (black line), and commercial real estate stocks (red line). As you can see, the "risk on, risk off" trade advanced early this year. It was clobbered during late summer/early autumn. It is rallying now. Keep this incredibly important correlation idea in mind when attempting to build a diversified portfolio.
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Stat of the week
61%
Decline in the share price of movie rental business Netflix since mid-July. The popular firm is dealing with one of the biggest pricing fiascos in corporate history.
In The Daily Crux
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