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The Secret Second-Best Asset of the Last DecadeBy
Wednesday, September 8, 2010
"Steve, where do you find all these weird investing ideas?"
I hear that all the time...
Rare gold coins, tax certificates, virtual banks, timberland investments... You name it, I'm not afraid of it. If I can easily understand the risks and I can easily understand how great a deal it is, then I'm interested.
If you're just sticking with stocks, you're missing out. You'd be surprised at what has performed really well over the last decade... I'll tell you today.
But first, where do I find these ideas? I look hard for them! Seriously...
It really started for me in the late 1990s, when all the "normal" investing ideas were terribly overpriced. Stocks were a terrible deal. I didn't think they'd do well over the next decade.
So I started looking for assets that had performed well the last time stocks went into a bear market. My "template" was the decade of the 1970s...
As you probably know, gold and oil were top performers in the 1970s. Good performers that you may not think of included high-end collectibles (like art, rare coins, and stamps)... and farmland.
This time around, amazingly, the results are no different...
Since the start of 2000 (specifically, from December 31, 1999 to June 30, 2010), the same assets that performed well in the last great bear market in the '70s have performed well in this great bear market.
Meanwhile, just like the 1970s, stocks haven't even kept up with inflation.
Take a look:
Farmland – the second-best-performing asset – was the real surprise on the list to me.
The total return on farmland (including income from farming and price appreciation) was an astounding 263%, based on data from the National Council of Real Estate Investment Fiduciaries (NCREIF).
Also, astoundingly, farmland has only had one "down" quarter since the NCREIF started compiling data in 1992... In the fourth quarter of 2001, farmland lost only 0.01%.
Why farmland? When food prices go up, farmland prices go up. There's no shortage of mouths to feed – on this side of the globe or the other.
And as an added benefit, farmland returns have little correlation to the returns on stocks and bonds. Farmland didn't fall in a single quarter during the financial meltdown.
But how can you play it?
In the stock market, you can play farmland indirectly, through fertilizer stocks... In Market Notes earlier this year, DailyWealth editor in chief Brian Hunt shared a strategy on fertilizer company Mosaic (MOS).
Brian wrote: "One can earn yield on farmland by owning this stock and performing the income strategy of selling covered calls on it... near-the-money calls will throw off an 11% instant payout here. Beats sitting on a tractor..."
Individual stocks in the U.S. that own a great deal of farmland are hard to come by. (In today's DailyWealth Premium, I share a company that recently acquired the farming rights to over one million acres in Canada. My colleague Dan Ferris, who broke the story, believes this farmland investment could end up doubling or tripling the stock price.)
Of course, the best strategy for making gains over the next decade might be to start from the bottom of the list above instead of the top... That way you're buying what's out of favor.
What's out of favor now? Based on that list... it's tech stocks, which I raved about last week in DailyWealth.
Good investing,
Steve
Further Reading:
If you're looking to get into the No. 1 alternative asset of the next decade, go back and read Tom Dyson's recent essay on the best way to buy gold today. "We're entering severe financial turbulence," Tom writes, "and gold coins are the ultimate insurance." Get Tom's specific recommendations here: The Three Best Gold Coins to Buy Right Now.
If you'd rather go Steve's route and pick the out-of-favor asset, don't miss his recent essay on why he's keeping a close eye on Big Tech here: All This "Dead Cash" Is Disguising Crazy Cheap Stocks.
Market NotesANOTHER BASICS WINNER FOR INTERNATIONAL INVESTORS Big news from a leading "China play in drag"... YUM just struck a new 52-week high.
For the past several years, Yum Brands (symbol: YUM) – the operator of fast-food chains KFC, Pizza Hut, and Taco Bell – has been a stealth play on China's emerging middle class.
While most think of KFC and Pizza Hut as pure Americana, few realize YUM's business is enormously exposed to China. Its KFC brand is the largest and fastest growing fast-food chain in China... and over 30% of the company's operating profit comes from the country. This idea is like our "basics" approach to investing in high-growth markets like China... through companies that sell "boring stuff" like beer, cigarettes, coal, and food.
As you can see from today's chart, the basics approach is working. YUM's huge international exposure has helped boost earnings and sales so much, the company just cleared a five-month base and struck a new 52-week high. It pays to be long chicken in China.
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